The Forlorn Trading Company has today (August 20, 2024) sold one bank bill futures contract with a March 2025 expiry. This means:

A. Forlorn has a contractual obligation to sell a bank bill to the counter-party in March 2025 at the bank bill price that prevails in March 2025.

B. Forlorn has a contractual obligation to sell a bank bill to the counter-party in March 2025 at a price determined today.

C. Forlorn has a contractual obligation to buy a bank bill from the counter-party in March 2025 at the bank bill price that prevails in March 2025.

D. Forlorn will benefit from a fall in the bank bill yield between today and March 2025.

E. Forlorn has a contractual obligation to buy a bank bill from the counter-party in March 2025 at a price determined today.

Assume today is the 4th May and you intend to issue a single 110 day bank accepted bill on the 12th June. You decide to take a position in a bank bill futures contract to hedge the interest rate risk that you face between now and the 12th June. The table below provides the spot and futures prices of the underlying bank bills at both the 4th May and the 12th June.

4th May 12th June

90 day BAB spot $950,000 $955,000

110 day BAB spot $880,000 $884,000

90 day BAB futures $951,000 $958,000

Calculate the actual amount raised on the 12th June from the bank bill issue plus any profit or loss in closing out the futures contract.

A. $880,000

B. $883,000

C. $877,000

D. $886,000

E. $884,000

Which one of the following statements is CORRECT?

A. Bond (X) has a DV01 of $50 and bond (Y) has a DV01 of $75. Therefore, bond X must be more sensitive to changes in the relevant interest rate than bond Y.

B. DV01 measures the curvature of a bond's price yield curve at a particular point.

C. DV01 has no relationship to the interest rate sensitivity of a bond.

D. Bond (X) has a DV01 of $50 and bond (Y) has a DV01 of $75. But, it is not possible without additional information to determine which bond is the most sensitive to changes in the relevant interest rate.

E. Bond (X) has a DV01 of $50 and bond (Y) has a DV01 of $75. Therefore, bond Y must be more sensitive to changes in the relevant interest rate than bond X.

Which one of the following statements regarding interest rate swaps is FALSE?

A. The floating (or variable) cash flow is determined by the floating interest rate that prevails at the time of the cash flow.

B. If I currently have a floating rate loan, I can use an interest rate swap to transform the loan to a fixed rate loan.

C. Today you have entered a swap where you pay fixed and receive floating. If the market yield on the fixed side of the swap rises significantly tomorrow, this will be a benefit to you.

D. They are not used to raise capital.

E. If I manage a portfolio of debt (as a liability), and enter a swap where I pay fixed and receive floating, this will increase the duration of my portfolio.

Assume today is the 4th May and you intend to issue a single 110 day bank accepted bill on the 12th June. You decide to take a position in a bank bill futures contract to hedge the interest rate risk that you face between now and the 12th June. What is the nature of the interest rate risk you face and how will you use futures to hedge that risk?

A. My risk is that short-term rates will fall; I will hedge by selling bank bill futures.

B. My risk is that short-term rates will rise; I will hedge by selling bank bill futures.

C. My risk is that short-term rates will rise; I will hedge by buying bank bill futures.

D. My risk is that short-term rates will fall; I will hedge by buying bank bill futures.

E. My risk is that short-term rates will not change; I will hedge by buying bank bill futures.