A fund manager manages a portfolio of two-year bonds with a total market value of $2 million. These bonds carry a 4% p.a. coupon paid semi-annually. Concerned that the volatile fluctuation in the interest rates will affect the market value of her bond portfolio, the fund manager would like to take a position in the three-year New Zealand Government Stock futures contract (TYS) at a price of 92.00 (or 9200 implying an 8% p.a. yield-to-maturity) to hedge the interest rate risk. The asset underlying this TYS contract is three-year government stock with $100,000 face value, 8% p.a. coupon, paid semi-annually. Assume that the yield curve is flat at 8% (semi-annual compounding), that is, yields for all maturities are % and that the duration of TYS contract is 2.726 years when yields are 8% p.a.. The duration of the two-year bonds is (1.74/2.12/1.94/2)years and the bond manager needs to (short/long) the TYS contract for hedging the risk of interest rate (rise/drop). The duration-based optimal number of TYS contracts for hedging the interest rate risk for the bond portfolio is ? . Note: Please provide your answer as a positive number with two decimal points in the format of xx.xx (for example, if the answer is 12.345, type in 12.35).

6.You are the treasury manager of a bank and you know that the bank will need to borrow.$15 million for 3 months in two months time.Interest rates are currently 6.8% and the current quoted price for bank accepted bills futures contracts expiring in 3 months is 92.4.(Assume 30 days each month,365 days in a year,and futures contracts have a standard $1 million face value) (a)Today,what position would you take in the futures market to hedge this risk? Enter"1"for buy/long futures contracts or "2" for sell/short futures contracts (b)After two months,interest rates fall to 6.55% and the quoted price for bank-accepted bills futures contracts is 92.9. What is the profit or loss on the futures market?(for a loss enter a negative number) $ (round your answer to two decimal places) What is the profit or loss on the physical market?(for a loss enter a negative number) $ (round your answer to two decimal places) (c)Was this a perfect hedge? Enter"1"for yes and "2"for no

In futures markets investors who expect to purchase future bonds can reduce the risk of price fluctuations by taking a/an:Question 8Select one:a.arbitrage position on futures contracts.b.long position on futures contracts.c.short position on futures contracts.d.marked-to-market position on futures contracts.

In futures markets investors who expect to purchase future bonds may hedge against the effects of falling interest rates by:Question 8Select one:a.taking an arbitrage position on bond futures contracts.b.buying bond futures contracts.c.selling bond futures contracts.d.buying and selling similar bond futures contracts.

Weston Ltd is a company of underwriter that today has had to take up a 10-year debenture issues by XYZ Ltd. XYZ debenture offers a coupon rate of 7.5% p.a. paid semi-annually and is currently priced at a yield of 5.5% p.a. compounded semi-annually. Face value is $10 million.Weston Ltd intends to hedge its position by utilizing the SFE 10-year Treasury bond futures contract. Assume a coupon rate of 6% p.a. compounded semi-annually for the Treasury bond, and the current quoted price for the future contract is $90.50. The contract size (i.e., the face value) for a unit of the 10-year Treasury bond future contract is $100,000. What Strategy and how many SEF futures contracts are required by Weston Ltd to hedge its position in the XYZ debenture? (Duration for XYZ debenture = 5.4732; Duration for futures contract = 6.3244).Short 105 SEF futures contractsLong 105 SEF futures contractsShort-sell 105 SEF futures contractsNone of the above.

Suppose that a life insurance company sells a five-year guaranteed investment contract that guarantees an interest rate of 7.5% per year on a bond-equivalent yield basis (or equivalently, 3.75% every six months for the next 10 six-month periods). Also suppose that the payment made by the policyholder is $9,642,899. Consider the following three investments that can be made by the portfolio manager: Bond X: Buy $9,642,899 par value of an option-free bond selling at par with a 7.5% yield to maturity that matures in five years. Bond Y: Buy $9,642,899 par value of an option-free bond selling at par with a 7.5% yield to maturity that matures in 12 years. Bond Z: Buy $10,000,000 par value of a six-year 6.75% coupon option-free bond selling at 96.42899 to yield 7.5%. Answer the below questions. (a) Holding aside the spread that the insurance company seeks to make on the invested funds, demonstrate that the target accumulated value to meet the GIC obligation five years from now is $13,934,413.