Question
The simplest way to hedge the interest risk is the price sensitivity method. What is the drawback of this strategy? Group of answer choices [A]
- The simplest way to hedge the interest risk is the price sensitivity method. What is the drawback of this strategy?
Group of answer choices
[A] You can not hedge all the interest risk
[B] If the risk = 0, the profit = 0 too.
[C] You must balance the portfolio very frequently.
[D] You must analyze the events that can affect the interest rate.
2. Suppose you take a long position in a 3-month (90-day) T-bill futures contract at RD = 5%, how much cash would you have to deposit to satisfy an initial margin requirement of 5%? (Hint: face value is $1,000,000)
Group of answer choices
[A] $47,500
[B] $50,000
[C] $987,500
[D] $49,375
3. In June, the Carey Money Market Fund forecasted a September cash inflow of $15 million that it plans to invest for 92 days in T-bills. The fund is uncertain about future short-term interest rates and would like to lock in the rate on the September investment with T-bill futures contracts. Currently, September T-bill contracts are trading at 93 (IMM index).
If the Carey Money Market Fund expects interest rates to be higher in September but is worried that rates would decrease. Suppose there is a September T-bill futures call contract with an exercise price of 93 (IMM index), trading at 5, and expiring at the same time as the September T-bill futures contract. How may call options do Carey need to lock in a minimum rate on its investment? What is the cost?
Group of answer choices
[A] 15 call contracts at cost of $18,750
[B] 18 call contracts at cost of $22,500
[C] 15 call contacts at cost of $75
[D] 18 call contacts at cost of $90
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