700 Part Eight Risk Management
bre44380_ch26_673-706.indd 700 09/30/15 12:09 PM
- Futures contracts List some of the commodity futures contracts that are traded on
exchanges. Who do you think could usefully reduce risk by buying each of these contracts?
Who do you think might wish to sell each contract? - Futures hedging Phoenix Motors wants to lock in the cost of 10,000 ounces of platinum
to be used in next quarter’s production of catalytic converters. It buys three-month futures
contracts for 10,000 ounces at a price of $1,300 per ounce.
a. Suppose the spot price of platinum falls to $1,200 in three months’ time. Does Phoenix
have a profit or loss on the futures contract? Has it locked in the cost of purchasing the
platinum it needs?
b. How do your answers change if the spot price of platinum increases to $1,400 after three months? - Futures prices In December 2014, 6-month futures on the Australian S&P/ASX 200 Index
traded at 5,376. Spot was 5,442. The interest rate was 2.5%, and the dividend yield was about
4.7%. Were the futures fairly priced? - Futures prices If you buy a nine-month T-bill future, you undertake to buy a $1 million
three-month bill in nine months’ time. Suppose that Treasury bills and notes currently offer
the following yields:
Months to Maturity Annual Yield3 6%
6 6.5
9 7
12 8What is the dollar value of a nine-month bill future?- Futures prices Table 26.4 contains spot and six-month futures prices for several commodi-
ties and financial instruments. There may be some money-making opportunities. See if you
can find them, and explain how you would trade to take advantage of them. The interest rate
is 14.5%, or 7% over the six-month life of the contracts. - Futures prices The following table shows 2014 gold futures prices for varying contract
lengths. Gold is predominantly an investment good, not an industrial commodity. Investors
hold gold because it diversifies their portfolios and because they hope its price will rise. They
do not hold it for its convenience yield.
Contract Length (months)
3 6 12
Futures price $1,188.5 $1,189.5 $1,190.0Calculate the interest rate faced by traders in gold futures, assuming a zero net convenience
yield, for each of the contract lengths shown above. The spot price is $1,188.2 per ounce.- Swap values In September 2020 swap dealers were quoting a rate for five-year euro interest-
rate swaps of 4.5% against Euribor (the short-term interest rate for euro loans). Euribor at the
time was 4.1%. Suppose that A arranges with a dealer to swap a €10 million five-year fixed-
rate loan for an equivalent floating-rate loan in euros.
a. What is the value of this swap at the time that it is entered into?
b. Suppose that immediately after A has entered into the swap, the long-term interest rate
rises by 1%. Who gains and who loses?
c. What is now the value of the swap?