solutionmanualforinvestmentanalysisandportfoliomanagementch22

1、chapter 22forward and futures contractsanswers to questions1.there are many different reasons some futures contracts succeed and some fail, but the most important is demand. if people need a particular contract to expose themselves to or hedge a price risk, then the contract will succeed. most peopl

2、e use treasury bond futures to gain exposure to or hedge general long-term interest rate risk. the only additional advantage of futures on corporate bonds would be that the investors could gain exposure to changes in the credit spread. apparently there is little demand for this, either because inves

3、tors do not want to hedge or gain exposure to this risk or because the underlying market is not liquid enough to support futures. either way, the lack of futures is motivated by a lack of demand in the asset or futures contract. the lack of chicken contracts most likely derives from a similar lack o

4、f demand. it could be that chicken prices are highly correlated with other existing contract prices, so investors do not need the additional chicken contract. perhaps there are too many different types of chickens to have a single contract that would attract enough trading volume.2.before entering i

5、nto a futures or forward contract, hedgers have exposure to price changes in the underlying asset. to hedge this risk, hedgers enter into contracts that most closely offset this price risk. the problem is that for most hedgers there is not a contract that exactly matches their exposure. perhaps, the

6、 commodity they use is a different grade or needed in a different location than specified in the contract, so differences in prices between the actual asset the company is exposed to and the asset in the contract may exist and change over time. likewise, a portfolio manager hedging a stock portfolio

7、 may hold a portfolio that is not perfectly correlated with the index future he/she is using to hedge with. to minimize basis risk it is necessary to find the contract whose price is most highly correlated with the price of the asset to be hedged.3(a).to hedge price risk, you could enter into a long

8、 position in 100,000 gallons worth of gasoline futures.3(b). since you will have to post margin on the futures contract, the price swings in the futures contract will effect how much you earn on the capital posted as margin. if gas prices go up, your margin account will be credited and you will earn

9、 more interest. if gas prices go down, your account will be debited and you will earn less interest. if prices go down substantially, you will be required to post additional margin, and therefore tie up additional capital. how this effects your pricing of the forward contract you have sold depends o

10、n your opportunity cost of capital.3(c). in this case, by using futures you will not be able to match the quantity or time of delivery in the forward contract you sold. this gives rise to two types of risk. since you will be forced to over or under hedge, you will be exposed to the general price mov

11、ements in gas one way or the other. next, if you synthetically create a three month expiration using half two-month and half four-month contracts, then you will be exposed to relative price changes in the two futures contracts in the near term. later, after the two-month contract expires, you will b

12、e forced to hedge a shorter term position with a longer term contract, so again relative near-term and longer-term price differentials will lead to basis risk.4.there are two types of basis risk that this hedge is exposed to. the first is from changes in the shape of the yield curve. since the compa

13、ny wishes to hedge a seven year issues cost with a ten year contract, the hedge is exposed to changes in the relative level of interest rates between the seven and ten year maturities. specifically, if the seven-year treasury rate rises more relative to the ten-year rate then the hedge will not comp

14、letely neutralize the position and lose money for the firm. the second source of basis risk is from the quality spread over treasuries in the eurobond market. since the company will have to sell its bonds with a spread over the treasury rate, changes in this spread will also effect the quality of th

15、e hedge. specifically, increases in the spread will lead to losses for the firm.5.cfa examination ii (1997)5(a).what lane should doto protect his investment from declining interest rates, mike lane should purchase, or “go long,” $5 million worth of u.s. treasury five-year-note futures contracts. lan

16、e can actually purchase any of the traded five-year-note futures contracts, depending on what date he actually plans to invest his $5 million.5(b).effect of higher interest rates on lanes positionif rates increase by 100 basis points in three months, the price of these futures contracts will decline

17、 and lane will have a loss in his long futures position. the loss will show up in his mark-to-market position over time and will require him to post additional margin money.5(c).return from lanes hedged position vs. unhedged return two methods can be used to answer part c.one answer is that the retu

18、rn from lanes hedged position will be lower than the return if he had not hedged. because of the futures contracts loss in part b, the higher yield lane can earn when he purchases a now lower priced (higher yield) u.s. treasury five-year note in the cash market is “offset” by the loss from the futur

19、es contract. the loss is actually added to the now lower price of the u.s. treasury five-year notes, thus decreasing lanes realized yield.a second answer draws from the clarke reading. the reading expresses the combined futures contracts price and cash market price in terms of “net price.” net price

20、 equals the new cash market price plus the original futures price minus the new futures price. subtracting net price from 100 gives the investor the realized yield and thus the investors return from the combined futures and cash markets. because rates have increased, the new lower cash market price

21、(higher yield) is increased by the loss from the futures contracts position, which reduces realized yield. the reading expresses this net price in several forms, but all are the same formula with rearranged terms.6.both eurodollar and treasury bill futures are designed so that the long position bene

22、fits from a decline in the respective reference rates (relative to the contract yield) while the short position benefits from a rate increase. in both cases, the purpose of the hypothetical price index is to translate rate declines into price increasesand vice versawhich is a more natural way to thi

23、nk of the contract holders position. despite the fact that the underlying rate for these contracts are quoted on different conventions, they can both use the same price index calculation because all that really matters at maturity (or contract unwind) is the number of basis points the settlement pri

24、ce differs from the original contract price, with each basis point being worth $25 (= $1,000,000) x .0001 x 90/360).7. it is most likely that a single position in an index futures market would be the best hedge. there are several reasons for this. the most important is cost. since there are no excha

25、nge traded futures for individual stocks, entering 50 different positions would have to be done through an over-the-counter derivative dealer. this typically would mean higher transaction costs to cover the fees from setting up the one-off deal, the lower liquidity of individual stocks, and the incr

26、eased commissions for the dealer. another disadvantage is the liquidity of the position. index options are very liquid and can be closed out quickly with little trading cost. closing the 50 different positions would entail paying many of the start-up costs twice. finally, it is easy to short an inde

27、x future but rather hard and more expensive to short the underlying stocks which the otc dealer would have to do to hedge the position in the 50 different stocks. the only advantage to the 50 different positions is that they would provide a nearly perfect hedge, whereas there would be some basis ris

28、k in the index futures position. since the portfolio is well diversified, this should not be a major problem.8.cfa examination ii (1991)the fourth factor affecting the price of a stock index futures contract is the risk-free interest rate, usually measured by the treasury bill rate. futures prices i

29、ncrease with increases in the risk-free interest rate. investors can create portfolios having identical levels of risk by either investing directly in a diversified equity portfolio or purchasing an equivalent position in stock index futures and placing the remainder in risk-free assets. the stock p

30、ortfolio earns the price appreciation of the stocks plus their dividend yield; the futures portfolio earns the price appreciation of the futures plus the risk-free interest rate. since futures are marked to the market, the futures price will equal the spot price of the stocks at the futures contract

31、s expiration date. market forces (arbitrage activity) results in stock index futures being priced such that their price is equal to the future value of the current spot price, using the “cost of carry” as the discount rate. the cost of carry is the risk-free interest rate minus the dividend yield on

32、 the stock portfolio.if the risk-free interest rate subsequently increases, it becomes more profitable to purchase the futures/treasury bill combination than to invest directly in the stocks themselves, because of the higher return on the treasury bills now available. as a result, the price of the f

33、utures contract will be bid up until it is again equal to the future value of the current spot price of the equivalent stock portfolio. there is, thus, a direct and positive relationship between the risk-free interest rate and futures prices.9.when the index futures price is below its theoretical le

34、vel, the arbitrage involves buying the futures contract and selling the underlying index of stocks short. when the index futures price is above its theoretical level, the arbitrage involves selling the futures contract and buying the underlying index of stocks. the practicalities of selling the inde

35、x short make the first type of arbitrage more difficult. first, there is an up-tick rule for short sales that prevents short sales from being possible for all of the indexs stocks at the current market price. this is because, on average, about half of the market prices will have just moved down a ti

36、ck and the up-tick rule prevents short sales until they trade up a tick. second, margin requirements and limitations on the use of proceeds from short sales demand the use of more capital than long positions in the underlying stocks. finally, for some stocks there may not be shares available to borr

37、ow and then short, or shares borrowed may be recalled by the original owner prior to the arbitrageurs preferred time to close the position.10.cfa examination iii (1989)if wec invests in bunds, they can use the current spot rate to calculate how many bonds they will receive today for $30 million. we

38、can assume wec is satisfied with the bund interest rate and motivated primarily by a desire to diversify and reduce interest rate risk. even if they could guarantee the deutschemark value of the bonds they will hold, however, they would still face exchange rate risk. a currency futures contract sets

39、 the rate for future exchange of marks for dollars. with a prior agreement, like a futures contract, wec can guarantee their exchange rate six months hence.short futures positions will incur losses as the exchange rate rises and gains as the exchange rate falls. the dollar value of the bunds will ch

40、ange in the opposite direction. a perfect hedge would have wec buy just enough futures (face value in marks) to cover the marks they will repatriate.undesirable characteristics:even a perfect fixed futures hedge does not preserve the entire $30 million. the futures settlement rate for six months hen

41、ce is almost surely less favorable than the exchange rate today. wec can hedge but probably will lock in a loss, even without transaction costs. this loss is part of the opportunity cost of hedging - forgoing the chance of exchange rate gains in return for preventing exchange rate losses.fixed curre

42、ncy hedges are rarely perfect because german mark futures contracts are for a fixed amount (currently 125,000 dm) and may not be an integer multiple of the number of marks purchased today. a typical fixed futures hedge is either slightly over or under hedged.currency futures positions require margin

43、. losses must be paid daily. if wec does not liquidate gains on the bunds to fund losses on the futures, they may need extra cash some time during the six months.fixed currency hedging also presents problems when the bunds mature beyond the six month holding period. wec will not know exactly how man

44、y marks it will need to repatriate six months hence. hedging by shorting a fixed number of contracts is rarely done unless the foreign investment is a pure discount security.11.first, enter into a forward position agreeing to exchange pesos for dollars in two months. then, enter into another forward

45、 contract agreeing to exchange those dollars for swiss francs, also in two months.12.because the funds from one country could be converted to another currency and then through the use of forward contracts converted back to the original currency at the same rate, an arbitrage opportunity is available

46、. investors from the country b could borrow at the lower rate, convert into the currency of country a, earn a higher rate of return on the money, and then pay back their loan pocketing the difference in interest payments. the market forces from these transactions would tend to either equalize intere

47、st rates or change the forward exchange rates so that the currency of country a trades at a forward discount.chapter 22answers to problems1(a). price adjustmentmargin maintenancemarch 9$173.00 03000 0april 9$179.75-6752325 0may 9$189.00-92530001600june 9$182.50 6503650 0july 9$174.25 8254475 0net lo

48、ss of $4475 - ($3000 + $1600) = -$125(including maintenance)total return = -125/3000 = - 4.17%1(b). cost of carry = 1.5%+8%=9.5%theoretical spot price on march 9s = pv(f)s = 173*exp(1.095*.3333)s = $167.61implied may 9 prices = $189*exp(-.095*.16667)s = $186.031(c). futures (forwards) unwind without

49、 (with) discounting net differential, so short futures long forward netmay 9 -(189 - 173) x100= ($1,600) (189-173) x 100 x exp(-0.8x .1667) = $1,578.81 -21.19june 9 -(182.5 -173)x100=($950.00) (182.5 - 173) x 100 x exp(-0.8 x 0.0833)=$943.69 -6.31this implies that the forwards underhedge with equal

50、notional amounts of forwards and futures.2(a).client a would need to go short 10,000 units of the june 1 contract at $24.95 and long 15,000 units of the september 1 contract at $25.85 the change in value of the two contracts to client a is= (24.95-25.85) x 10,000 + (25.85-25.65) x 15,000 = ($2,500.0

51、0)so, you would receive this amount since this is the amount of their losses.2(b).you would need to add in the interest received on the margin balance.2(c).if client b called to default, it would not be to your advantage since they had a long position at $26.40 and the price has declined to $25.85.

52、so you would lose 25,000 x ($26.40-$25.65) = $18,750.00 at expiration, which in present value terms is $18,610.42.2(d).yes, you were short the equivalent of 25,000-15,000=10,000 contracts so you would be harmed by a price increase.3(a).you buy the coffee at 58.56 cents per pound. this will cost 75,0

53、00 x ($.5856) = $43,920. your futures profit will be 75,000 x ($ .592 - $ .5595) = $2,437.50. this reduces the effective price at which you buy the coffee to $43,920-$2,437.50 = $41,482.50. this is an effective price per pound of $41,482.50/75,000 = $ .5531. so you paid 55.31 cents per pound.buying

54、two contracts for 75,000 pounds at 55.95 cents/pound leaves 7,000 pounds unhedged and therefore purchased in the spot market for 58.56 cent/lb. the effective price per pound is therefore = (75,000 x 55.95 + 7,000 x 58.56)/82,000 = 56.17 cents/pound.the difference in price between spot and future is

55、probably due to delivery costs.3(b).there are a couple of types of basis risk. first the anticipated amount is not exactly hedgable because of the contract size. this means you will either have to over-hedge or under-hedge. also you may not know the exact amount that you will really need at the futu

56、re date. if you are really going to purchase the coffee somewhere else and were only using the futures to hedge (i.e. close your position before delivery) then you will be exposed to changes in the relative prices between the market you purchase in and the futures market.4.cfa examination iii (1999)

57、4(a). futures are an efficient, low-cost tool that can be used to alter the risk and return characteristics of an entire portfolio with less disruption than using conventional methods there may also be both institutional constraints and unfavorable tax consequences that prevent a portfolio manager s

58、uch as klein from liquidating the entire portfolio. because treasury bonds and treasury bond futures have a very high correlation, the futures approach allows one to effectively create a temporary fully liquidated position without disturbing the portfolio. futures can be sold against the portfolio t

59、o replicate the price response of then portfolio with the desired duration. in addition, there are cost advantages of using futures contracts including lower execution costs (bid-ask spread), speed and ease of executions (time required), and the higher marketability and/liquidity of futures contract

60、s. the bond sale strategy may well be disadvantageous on all counts. shortening the duration by liquidating the bond portfolio would be more costly, time consuming, and disruptive to the portfolio, with possible adverse tax implications as well. in kleins case, there may be more bonds to sell than f