Question 4 (12 Marks) Assume you are playing the trading game and you are the manager of a portfolio of liabilities that had a market value of $1.1 billion at the start of the current quarter (i.e., on 15th March). Bond coupons (and fixed swap payments) are paid in March and September each year. Today is 14th June 2001, which is the last day of the quarter. The yield on 10-year bonds rose significantly during the current quarter. Other information: At the start of the current quarter (i.e., on 15th March) you advanced one of your clients $100mil for five years and the same client (QEPA) requires a further $20mil tomorrow (the first day of the new quarter). For new advances, the five-year fixed rate was 5.77% on 15th March and will be 6% tomorrow. Another client (LG), will make a one-off repayment of $15mil tomorrow and a debt service payment of $3.4mil. On behalf of LG, tomorrow, you will also enter a forward contract (which settles in three months' time) to buy $20mil USD (AUD$40mil) that LG needs to pay a supplier. At the start of the current quarter, you bought 500 10-year bond futures contracts with brokerage of $5 per contract and deposit margin of $1,000 per contract (assume that the deposit margin has not accrued interest over the quarter). The absolute dollar value of variation margin on the futures contract stands at $700,000 for the quarter. At the start of the current quarter, you issued commercial paper with face value of $212,601,014. The face value and coupon of bonds currently on issue is: DB02 ($150mil/5.2%); DB04 ($100mil/5.1%); DB06 ($250mil/5.3%); and DB11 ($226.77mil/5.65%). There are two pay-fixed, receive-floating domestic interest rate swaps on issue with face value and coupon: IRSDB04 ($50mil/5.1%) and IRSDB11 ($125mil/5.65%). Also on issue is one USD denominated Eurobond (US11) with face value and coupon of $USD36mil/6% and one Euro denominated Eurobond (EUR06) with face value and coupon of EUR58.75mil/5%. Both Eurobonds have been swapped back into domestic CP3M with a face value of AUD165mil. Last quarter you made a significant error and raised too much money. As a result, the portfolio cash at bank balance is currently $85mil. Assume that there are no other debt service payments other than those mentioned or implied above. Also, assume an administrative charge of 0.5% per annum. Required: a) Calculate the net client cash flows that will occur on the first day of the new quarter (i.e., tomorrow). Clearly show and label all calculations and cash flows. [4 marks] b) Calculate the portfolio generated cash flows. Note: The mid 3-month rate from last quarter (for the floating side of swaps) was 5.67% and there were 92 days in the quarter just completed. [6 marks] c) Calculate the net funding or investment amount. Clearly state whether the amount requires a funding or an investment. [2 marks] Question 4 (12 Marks) Assume you are playing the trading game and you are the manager of a portfolio of liabilities that had a market value of $1.1 billion at the start of the current quarter (i.e., on 15th March). Bond coupons (and fixed swap payments) are paid in March and September each year. Today is 14th June 2001, which is the last day of the quarter. The yield on 10-year bonds rose significantly during the current quarter. Other information: At the start of the current quarter (i.e., on 15th March) you advanced one of your clients $100mil for five years and the same client (QEPA) requires a further $20mil tomorrow (the first day of the new quarter). For new advances, the five-year fixed rate was 5.77% on 15th March and will be 6% tomorrow. Another client (LG), will make a one-off repayment of $15mil tomorrow and a debt service payment of $3.4mil. On behalf of LG, tomorrow, you will also enter a forward contract (which settles in three months' time) to buy $20mil USD (AUD$40mil) that LG needs to pay a supplier. At the start of the current quarter, you bought 500 10-year bond futures contracts with brokerage of $5 per contract and deposit margin of $1,000 per contract (assume that the deposit margin has not accrued interest over the quarter). The absolute dollar value of variation margin on the futures contract stands at $700,000 for the quarter. At the start of the current quarter, you issued commercial paper with face value of $212,601,014. The face value and coupon of bonds currently on issue is: DB02 ($150mil/5.2%); DB04 ($100mil/5.1%); DB06 ($250mil/5.3%); and DB11 ($226.77mil/5.65%). There are two pay-fixed, receive-floating domestic interest rate swaps on issue with face value and coupon: IRSDB04 ($50mil/5.1%) and IRSDB11 ($125mil/5.65%). Also on issue is one USD denominated Eurobond (US11) with face value and coupon of $USD36mil/6% and one Euro denominated Eurobond (EUR06) with face value and coupon of EUR58.75mil/5%. Both Eurobonds have been swapped back into domestic CP3M with a face value of AUD165mil. Last quarter you made a significant error and raised too much money. As a result, the portfolio cash at bank balance is currently $85mil. Assume that there are no other debt service payments other than those mentioned or implied above. Also, assume an administrative charge of 0.5% per annum. Required: a) Calculate the net client cash flows that will occur on the first day of the new quarter (i.e., tomorrow). Clearly show and label all calculations and cash flows. [4 marks] b) Calculate the portfolio generated cash flows. Note: The mid 3-month rate from last quarter (for the floating side of swaps) was 5.67% and there were 92 days in the quarter just completed. [6 marks] c) Calculate the net funding or investment amount. Clearly state whether the amount requires a funding or an investment. [2 marks]
