Use the derivative market to hedge against the risk

Assignment Help Financial Management

Reference no: EM131356069

Suppose that you are the vice-president of a bank. You have just agreed to lend $1 million at an interest rate of 6.75% in three months. However, the bank’s board worries that interest rate fluctuations between now and the effective date of the loan will expose the bank to risk. How can you use the derivative market to hedge against the risk?

Reference no: EM131356069

Questions Cloud

Find the mean and standard deviation of portfolio : Let and be the returns for two securities with = 0.03 and ) = 0.08, Var() = 0.02, Var() = 0.05, and Cov(, ) = -0.01. Plot the set of feasible mean-variance combinations of return, assuming that the two securities above are the only investment vehicle..

How should he divide is wealth between the two assets : Gibson Fender is contemplating dividing his portfolio between two assets, a risky asset that has an expected return of 10% and a standard deviation of 5%, and a T-bond that has a return of 6% a) If G. Fender is willing to accept a standard deviation ..

What is jack weighted average cost of capital : Jack's Construction Co. has 100,000 bonds outstanding that are selling at par value. The bonds yield 10.2 percent. The company also has 4.7 million shares of common stock outstanding. The stock has a beta of 1.9 and sells for $55 a share. The U.S. Tr..

What is the operating cash flow and cash flow to creditors : Quarles Industries had the following operating results for 2015: sales = $30,780; cost of goods sold = $20,110; depreciation expense = $5,540; interest expense = $2,940; dividends paid = $1,800. What is the operating cash flow for 2015? If no new deb..

Use the derivative market to hedge against the risk : Suppose that you are the vice-president of a bank. You have just agreed to lend $1 million at an interest rate of 6.75% in three months. However, the bank’s board worries that interest rate fluctuations between now and the effective date of the loan ..

Compute macrs depreciation for each of six calendar years : On September 3, John Smith paid $450,000 for a residential rental property. This purchase price represents $275,000 for the building and $175,000 for the land. Six years later, on June 26, he sold the property for $475,000. Compute the MACRS deprecia..

How much of a profit did i earn on this investment : 20 years ago I bought 1465 shares of stock in Cynex, Inc at a price of $35.69 per share. Since then, the stock has had three splits; the first split was 3:1, the second was 2:1 and the third was 2:1. Today I sold all my shares at the current price of..

Mortgagne pool underlying passthrough security : Suppose that in month 140 the mortgage balance for a mortgagne pool underlying a passthrough security is $537 million and that the scheduled principal payment for month 140 is $440,000. Assuming 175 PSA, what is the amount of the prepayment for month..

Price of the corresponding call option : A put option on a stock with a current price of $33 has an exercise price of $35. The price of the corresponding call option is $2.25. If the risk-free rate is 4%, the stock does not pay dividends and there are 3 months until expiration, what is the ..

User Account

All Pages