Compute the appropriate number of bond and equity futures

Reference no: EM131982247

Question: A European asset manager is concerned about the possible imminent withdrawal of Central Bank support for asset prices which might result in higher yields on bonds and lower on stock markets during the next 3 months. Consequently, they wish to fully hedge their portfolio against all risks. However, they are mandated to remain fully invested at all times so selling securities is not an option. Their portfolio currently comprises the following positions

Notional/Amount

Security Term $2 000 000

BTP Italian 10 years on -the-run

$5 000 000 Euro interest rate swap 5 years fixed rate payer

$50 000 000 German Equities

$50 000 000 USD LIBOR interest ratevdeposit with Bank of America 1 year

Current data for pricing and obtaining rates can be found at ft's website under data archive.

1. The asset manager wants to fully hedge the interest rate risk on the bonds by using bond futures and to hedge the equity risk by using index futures. Calculate the appropriate number of bond and equity futures that should be sold. You may assume that the portfolio of German equities has a beta of one to the German DAX index (bond and index future data can be found at eurexchange's website).

2. Explain the risks of the interest rate swap position and should it be hedged in this scenario? What impact might it have on the rest of the portfolio?

3. The asset manager would like to hedge the receipt of $50,000,000 to be received in one years' time from the maturity of the one year interbank deposit. Using current data from ft's website, calculate a one year €/$ forward rate and explain how it could be used to hedge the currency risk.

4. The asset manager thinks that there is some possibly that the currency markets could move in their favour and so ideally would like some degree of participation in any favourable move, whilst being fully protected against adverse moves. Discuss alternative hedging choices by using options. Currency option quotes on FX futures can be at cmegroup's website.

5. The interest rate swap counterparty is the same bank (Bank of America) to whom the asset manager lent $50,000,000 via the USD LIBOR deposit. The asset manager is concerned that a default by the Bank could give rise to substantial credit risk. Discuss how derivatives could be used to hedge this risk.

Reference no: EM131982247

Questions Cloud

Discuss the idea of religious compassion as soft power : Discuss the operationalisation of social and cultural capital and networks among two groups of people in Asia.

Critically analyse other key financial ratios for ARB : Compare the firm's capital structure with at least one other firm operating within a similar industry. Critically analyse other key financial ratios for ARB

Transverse wave and a longitudinal wave : What is the difference between a transverse wave and a longitudinal wave?

To what extent does your experience match the four stages : Whether from a sports team, a religious group, the military, or some other close-knit group, what experience, if any, have you had with role exiting?

Compute the appropriate number of bond and equity futures : Calculate the appropriate number of bond and equity futures that should be sold. You may assume that the portfolio of German equities has a beta of one.

Create a short track using audiotool digital studio : For this assignment, you are required to create a short track using Audiotool websites or another digital studio.

Holding a large briefcase mass : Inside an elevator , a businessman is holding a large briefcase whose mass is equal to 4.0 Kg. A) compite the force exerted by the businessman

Describe in words where the two cars collide : Two frictionless roller-coaster cars sit atop identical roller coaster tracks. The two roller-coasters meet at the bottom to form a single continuous roller

Discuss opportunities and obstacles to conducting business : Discuss opportunities and obstacles to conducting business in Cuba. Be sure to cite concepts from the textbook, successful international companies.

User Account

All Pages