You entered into a 2-year interest rate swap three months ago in which you are the payer (you pay fixed and receive floating). The yield to maturity of a 2-year fixed coupon bond three months ago was 7%. The 6-month LIBOR rate three months ago was 5.5% p.a. Interest is repaid every 6 months. The face value is $1000. The current yield to maturity of a 21-month fixed coupon bond is 8% p.a. What is the current value of the swap to you? Choose the closest answer. A. -$3.58 B. $3.58 C. $6.25 D. -$6.25

Assume today is 4th June and you intend to invest in 90-day Bank Accepted Bills (BAB) on 12th August. You decide to take a position in the BAB futures contract to hedge the interest rate risk that you are likely to face between now and the 12th August. What is the nature of the interest rate risk you are likely to face, and how will you use the BAB futures contract to hedge that risk? A. A rise in short-term interest rates, hence hedge by selling the BAB futures contract. B. A fall in short-term interest rates, hence hedge by selling the BAB futures contract. C. A fall in short-term interest rates, hence hedge by buying the BAB futures contract. D. A rise in short-term interest rates, hence hedge by buying the BAB futures contract.

Assume today is mid-October 2010. You expect to receive $1mil in mid-December 2010, after which you intend to invest in the Bank Accepted Bill (BAB) for 90 days (i.e. the investment period is between mid-December 2010 and mid-March 2011). Fearing that the BAB yield will move against you between now and mid-December 2010, you intend to lock in the investment yield by using the BAB futures. You will: A. Short BAB today B. Long BAB today C. Long the BAB futures today D. Short the BAB futures today

Which of the following statements is CORRECT? A. Speculative profit is the same as arbitrage profit. B. The purpose of hedging is not to make a profit. C. The purpose of speculation is not to make a profit. D. The purpose of arbitrage is not to make a profit.

Assume today is mid-October 2010 and you have just issued $1mil Bank Accepted Bill (BAB) for 90 days (i.e. the borrowing period is between today and mid-January 2011). Fearing that the BAB yield will move against you between now and mid-January 2011, you intend to lock in the borrowing rate by using the BAB futures. You will: A. Short the BAB futures today B. Long BAB today C. Long the BAB futures today D. Short BAB today

Suppose you are managing a portfolio of liabilities and the predicted change in the yield curve is that: short-term yield would increase by 1%, long-term yield would decrease by 1% and little change in mid-term yield, which trading strategy below would provide you the best outcome? A. Sell long-term bonds today B. Sell short-term bonds and buy long-term bonds today C. Buy long-term bonds today D. Sell short-term bonds today