2) On June 1, you contract to take delivery of 1 ounce of gold for $965. The agr

Question

2) On June 1, you contract to take delivery of 1 ounce of gold for $965. The agreement is good for any day up to July 1. Throughout June, the price of gold hit a low of $960 and hit a high of $990. The price settled on June 30 at $980, and on July 1st you settle your futures agreement at that price. Your net cash flow is:

3) Firm A is paying $750,000 in interest payments a year while Firm B is paying LIBOR plus 75 basis points on $10,000,000 loans. The current LIBOR rate is 6.5%. Firm A and B have agreed to swap interest payments. What is the net payment this year?

4) A mortgage banker had made loan commitments for $20 million in 3 months. How many contracts on Treasury bonds futures must the banker write or buy?

5) Duration is defined as the weighted average time to maturity of a financial instrument. Explain how this knowledge can help protect against interest rate risk.

Explanation / Answer

Answer:2) Long hedge

Payoff=$980-$965=$15

Net cash flow =$15

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