 Financial代写

## Chapter 14 Practice Problems

Financial代写 1.Georgetown Investments Corp. (“GIC”) on its most recent balance sheet has \$750 million of assets financed with \$200 million of floating···

### Financial代写

1.Georgetown Investments Corp. (“GIC”) on its most recent balance sheet has \$750 million of assets financed with \$200 million of floating-rate short-term debt.  \$300 million of long-term fixed rate debt, and \$250 million of common stock. Its total assets include \$150 million of floating-rate short-term interest-bearing not es.

Taylor Smith, one of the major stockholders, told the CEO of GIC at the last board meeting that she was very concerned about the company’s financial risk exposures inherent in its assets and liabilities. The CEO told her that the CFO of GIC was working on a plan to completely hedge the company’s interest rate risk (i.e., income gap).  And would report back at the next board meeting.

At the next board meeting, the CFO described the financial risk hedging plan. The CFO said the company had entered into a 3-year interest rate swap, with a notional principal of \$50 million, wherein GIC would receive interest income based on a _______ interest rate, and GIC would pay interest expense based on a ______ interest rate.

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1.A) fixed;  floating

2.B) floating;  fixed

3.C) floating; floating

4.D) fixed; fixed

(\$Millions)    Gap

Rate Sensitive: RSA  \$150 RSL \$200  -\$50

FRD \$300

Fixed Rate: FRA  \$150 CE \$250

Total \$750 Total \$750

What the CFO did to offset the -\$50 million Floating Rate Liability (pay) Gap?

### An Interest Rate Swap: Financial代写

+\$50 NP Floating Rate Receivable (receive)

So, this means the other side was a \$50 Fixed Rate Liability (pay)

2.A life insurance company expects to have \$8 million in cash to invest in one year (i.e., on September 15, 2016, assuming today is September 15, 2015). It wants to buy a series of U.S. Treasury Notes, the 5.50% due September 15, 2025 (“T-notes”) on September 15, 2016.  The current market yield to maturity for these notes is 4.25%. If the insurance company is concerned market interest rates will decrease over the next year. Would it make sense for the insurance company to agree on September 15.  2015 to purchase relevant CBT T-note future contracts that settle on September 15.  2016 at a price of \$111,152.9974 for each contract (face value is \$100,000)?  Assume interest payments are made annually.

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A) No. Because the insurance company would be better off if market interest rates increase over the next year.

B) Yes, because the current contract would lock-in a price for the T-notes that would provide the insurance company a yield to maturity comparable to today’s yield.

C) Yes, because the current contract would provide the insurance company the ability to earn a higher yield to maturity.

D) No, because the insurance company would be paying too much for the T-notes in the futures contract that would provide a yield to maturity that is lower than today’s yield.

The insurance company is concerned market interest rates will decrease over the next year and the price to be paid in one year will be higher than today’s expected price. So, it wants to lock-in a price today to pay in one year, so it needs to do a futures contract wherein it will “win” if market interest rates decrease from today’s expected level for September 15, 2016. If market interest rates decrease over the next year, then prices will increase. It can “buy” a T-note futures wherein it would agree to pay the fixed price of the contract (assuming the price is a fair price).

Today:  I = 4.25% Futures contract price for September 15, 2016 settlement = \$111,152.9974

In one year:  N = 2025-2016 = 9   PV = -\$111,152.9974    PMT = \$100,000 x 5.50% = \$5,500.00

FV = \$100,000  Calculate I = 4.0000%

### So  Financial代写

This means the current market price for the Treasury Futures contract would provide a lower-than market investment return, so this means the

price of the T-note contract is too high for this investor. The maximum price the insurance company investor should be as follows (based on the

current market yield of 4.25%):

In one year:  N = 2025-2016 = 9   I = 4.25    PMT = \$100,000 x 5.50% = \$5,500.00

FV = \$100,000  Calculate PV = –\$109,189.1871

So, by agreeing to pay \$109,189.1871 for each contract, the insurance company would be locking-in an investment return comparable to today’s current market required return of 4.25%. If the insurance company pays the asked price of \$111,152.9974, it would only be getting an investment return of 4.00%.

### And  Financial代写

1.  You are managing a portfolio of common stocks with a current market value of \$100 million. You have decided to hedge the price risk for approximately half of the portfolio using CME S&P 500 stock index futures contracts because you believe half of your portfolio’s market value moves comparably with this index. Assume the CME S&P 500 stock index futures contract costs \$250 per contract times the stated stock market index level.  If you agree to sell futures contracts on this stock market index at a future index level of 1100.50 for a settlement date in 7 months, how many contracts do you need to sell (round up to the nearest whole number of contracts)?  If the actual S&P 500 index is at 1125.00 today, what would be the net gain or net loss the hedged portion of your portfolio would experience if the actual S&P 500 stock index decreases to 1065.00 on the settlement date if you do the stock index futures contracts (and half your portfolio continues to track with that index)?  Calculate percentage gains/losses to 6 decimal places, and round up the number of contracts to the next-highest whole contract.
2. A) 182 contracts;  net loss of about \$1,450,000.
3. B) 181 contracts;  net loss of about \$976,000.
4. C) 182 contracts;  net loss of about \$1,055,280
5. D) 181 contracts;  net gain of about \$397,500
6. E) 182 contracts; net gain of about \$1,055,280

Hedge amount:  half of \$100 million = \$50 million

Each contract price: \$250 x 1100.50 = \$275,125;  \$50 mil./\$275,125 = 181.7356

= 182 contracts rounded up [  182 x \$250 x 1100.50 = \$50,072,750 ].

Gain and loss if actual index on settlement date is 1065.00:

Loss:   \$50,072,750 of million stock portfolio decreases (1065-1125)/1125 = -0.053333

= -5.3333% = \$(2,670,530)

Gain: +\$50,072,750 of hedge contracts’ fixed “sell” price to be received

If index is at 1065 on settlement, then pay

\$250 x 1065 x 182 = \$(48,457,500) to pay to settle with cash;

Net gain = \$50,072,750 less \$48,457,500 = +\$1,615,250.

This gain is offset in part by the decrease in market value of the hedged portion

of the portfolio:

\$(2,670,530) plus \$1,615,250 = \$(1,055,280) net loss.

In other words, the net gain in the futures contract partially offsets the decrease in value

the portfolio experiences. 