will honestly award a ton of points to whomever can answer this question:) repor
ID: 2806963 • Letter: W
Question
will honestly award a ton of points to whomever can answer this question:)
report Fri day from a central bank economist acknowledges what investors and bond dealers have known for some time: Treasurys aren't the benchm report, Federal Reserve Bank of New York Senior Economist Michael Fleming, points to arks they used to be...The author of the credit markets that have made Treasurys less attractive, particularly for investment bankers who take large positions i n bonds to hedge interest-rate or underwriting risks.. . It's precisely the e re free of default risk, however, that makes Treasury Bonds "inherently limited in their ability serve as good hedges of fixed-income securities that contain credit risk," Mr. Fleming wrote. Assume that you are an investment banker working in the risk management division of your bank. In order to attract corporate clients, the bond underwriting division of your bank has been guaranteeing to buy the new corporate bond issues which it underwrites at a negotiated fixed price. It then tries to market the bonds to institutional and high net worth investors a) Explain why investment banks in this situation face a risk which they might want b) Would the investment banks typically be buying or selling futures contracts in c) Suppose your CEO, (Who has his job only because he was the former CEO's son to hedge using Treasury futures markets. 2 pts hedging their exposure? Explain. 2 pts and is not otherwise the sharpest tool in the shed), read the above quote in the Wall Street Journal. He asks you for a one paragraph memo explaining the underlined statement clearly to him and to discuss its implications for the bank's customary strategy of hedging its corporate bond underwriting risks with T-Bond futures markets. Write a one paragraph memo. 4 ptsExplanation / Answer
a) As investment banks cannot predict the future price of securities it intends to underwrite it faces a risk of decline in price price. So in order to protect itself from price risk or marketability risk the bank has to hedge by using futures
b) Investment bank holds long position of securities. So, in order to hedge using futures it has to go short on futures of same contract amount.
c) Investment banker underwrites a security with an expectation to sell it at a price high than underwriting price. Sometimes due to judgemental error of investment banks, they tend to underwrite wrong securities or at wrong price or at wrong time in the market. In such a case, investment banks cannot sell the securities it took underwriting or may end up selling securities at a lower price i.e. at a loss. So, to hedge such price risk or marketability risk the bankers have to hedge itself using futures contracts.
Hope this will suffice, if any further explanation or clarification is needed please post a comment. I would be happy to help...
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