EBK INVESTMENTS
11th Edition
ISBN: 9781259357480
Author: Bodie
Publisher: MCGRAW HILL BOOK COMPANY
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Chapter 22, Problem 15PS
Summary Introduction
Case summary: A corporate treasurer buy bonds of $1 million for 3 months and he wants to repurchase that hedging bonds but it will take two months for granting the permission of boards of directors.
Characters in the case : A person and board of directors
Adequate information: Treasure purchases some bonds for 3 months and he wants to repurchase it as the prices go down. Then he should enter into a long position for it.
To determine: Action taken by one to repurchase the bonds in the future market or will go for the long or short.
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You are a corporate treasurer who will purchase $1 million of bonds for the sinking fund in 3 months. You believe rates will soon fall, and you would like to repurchase the company’s sinking fund bonds (which currently are selling below par) in advance of requirements. Unfortunately, you must obtain approval from the board of directors for such a purchase, and this can take up to 2 months. What action can you take in the futures market to hedge any adverse movements in bond yields and prices until you can actually buy the bonds? Will you be long or short? Why? A qualitative answer is fine.
ABC Co. has a large amount of variable rate financing due in one year. The management is concerned about the possibility of increases in short-term rates. Which would be an effective way of hedging this risk?a. Buy Treasury notes in the futures market.b. Sell Treasury notes in the futures market.c. Buy an option to purchase Treasury bonds.d. Sell an option to purchase Treasury bonds
A bank wishes to hedge its $30 million face value bond portfolio
(currently priced at 99 percent of par). The bond portfollo has a duration
of 9.75 years. It will hedge with T-bond futures ($100,000 face) priced at
98 percent of par. The duration of the T-bonds to be delivered is nine
years. How many contracts are needed to hedge? Should the contracts be
bought or sold? Ignore basis risk.
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