USE THE INFORMATION BELOW FOR THE FOLLOWING PROBLEM(S)

question 81

Multiple Choice

USE THE INFORMATION BELOW FOR THE FOLLOWING PROBLEM(S)
As a relationship officer for a money-center commercial bank, one of your corporate accounts has just approached you about a one-year loan for $3,000,000. The customer would pay a quarterly interest expense based on the prevailing level of LIBOR at the beginning of each quarter. As is the bank's convention on all such loans, the amount of the interest payment would then be paid at the end of the quarterly cycle when the new rate for the next cycle is determined. You observe the following LIBOR yield curve in the cash market:

-Refer to Exhibit 15.3. If the bank wanted to hedge its exposure to falling LIBOR on this loan commitment, describe the sequence of transactions in the futures markets it could undertake.

• A) buy three Eurodollar futures contracts that expire at the end of the first quarter
• B) buy three Eurodollar futures contracts that expire at the end of the first quarter, three that expire at the end of the second quarter, and three that expire at the end of the third quarter.
• C) sell three Eurodollar futures contracts that expire at the end of the year.
• D) sell one Eurodollar futures contract that expires at the end of the first quarter, one that expires at the end of the second quarter, and one that expires at the end of the third quarter.
• E) buy three Eurodollar futures contracts that expire at the end of the year.

Recognize the limits and assumptions underlying duration and its modifications.

Apply duration analysis to practical scenarios involving interest rate changes and bond portfolio management.

Understand the roles and responsibilities within a buying center.

Identify the different types of buying situations: new buy, modified rebuy, and straight rebuy.

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Definitions:

Court Decision

A ruling or judgment made by a court of law in a legal case, determining the outcome of the dispute in question.

Remedy

The means by which a court enforces a right, imposes a penalty, or resolves a dispute.

Injury

Harm or damage inflicted on a person's body, property, rights, or reputation.

Diversity of Citizenship

A legal principle allowing federal courts in the United States to hear cases involving parties from different states or countries.