Business School 4] Investment banks as traders (20 points) 4.1. Short-term inter
ID: 2818519 • Letter: B
Question
Business School 4] Investment banks as traders (20 points) 4.1. Short-term interest rate futures. Three months ago, Bank C bought 170 contracts of September 2018 short-term interest rate futures at a price of 98.20. The contract expires today, and the spot short-term interest rate is 2.35%. Answer with True or False: a. Total profit USD 233,750 b. Profit per contract USD 1,375 c. Total loss USD 233,750 d. Loss per contract USD 1,375 [5 points per correct answer 4.2. CDS compensation. Hamilton Ltd has just defaulted on its bonds. On 18 September 2018, a credit event is declared for CDS referenced to its bonds. The total value of protection sold by protection sellers is £1.7 billion. QUESTION: calculate the amount of compensation (in pounds) that protection sellers will have to pay, knowing that the bond used in the computation is a 5.5% fixed- coupon bond maturing on 18 September 2028, On the day of the credit event, it traded at a 27.12% yield or rate of return. [3 points for bond valuation, 7 for compensation)
Explanation / Answer
Answering 4.1
Correct ans is C
Notional Contract Value= 170*100=17000
Beginning Price= 98.20
Ending Price=100-2.35= 97.65
Duration=3 months =90 days
Profit/Loss = Notional contract amount × Contract duration/360 Days × (Ending price – Beginning price)
Therefore 17000* (90/360) * (97.65-98.20) = $2337.5
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