Question
The current credit spread on bonds issued by Trendy Manufacturing is 350 bps. The manager of an investment fund believes that Trendy Manufacturings credit situation
The current credit spread on bonds issued by Trendy Manufacturing is 350 bps. The manager of an investment fund believes that Trendy Manufacturings credit situation will worsen over the next few months, resulting in a larger credit spread on its bonds. She decides to enter into a six-month credit spread forward contract taking the position that the credit spread will increase. The forward contract has a current spread as the contracted spread, a notional amount of $10,000,000 and a risk factor of 5.
a) Will she go long (buy) buy or go short (sell) forward contracts?
b. On the settlement date six months later, the credit spread on Trendy Manufacturing's bonds is 400 bps. How much is the payoff (gain or loss?)
c. How much would the payoff to the investment fund be if the credit spread on the settlement date is 200 bps? ( is it a gain or a loss?)
d. What is the Maximum possible gain for the investment fund?
The current credit spread on bonds issued by Trendy Manufacturing is 350 bps. The manager of an investment fund believes that Trendy Manufacturing's credit situation will worsen over the next few months, resulting in a larger credit spread on its bonds. She decides to enter into a six-month credit spread forward contract taking the position that the credit spread will increase. The forward contract has a current spread as the contracted spread, a notional amount of $10,000,000 and a risk factor of 5 a. Will she go long (buy) buy or go short (sell) forward contracts? b. On the settlement date six months later, the credit spread on Trendy Manufacturing's bonds is 400 bps. How much is the payoff (gain or loss?) c. How much would the payoff to the investment fund be if the credit spread on the settlement date is 200 bps? ( is it a gain or a loss?) d. What is the Maximum possible gain for the investment fundStep by Step Solution
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