USE THE INFORMATION BELOW FOR THE FOLLOWING PROBLEM(S)

question 109

Multiple Choice

USE THE INFORMATION BELOW FOR THE FOLLOWING PROBLEM(S)
Suppose you are a loan officer for a commercial bank and one of your clients has just approached you about a one-year loan for $4,000,000. Interest on the new loan will be paid at the end of each quarter based on the prevailing level of LIBOR at the beginning of each quarter. The LIBOR yield curve in the cash market is as follows:

-Refer to Exhibit 15.7. A bond portfolio manager expects a cash inflow of $10,000,000. The manager plans to hedge potential risk with a Treasury futures contract with a value of $102,150. The conversion factor between the CTD and the bond specified in the Treasury futures contract is 0.88. The duration of bond portfolio is six years, and the duration of the CTD bond is 4.5 years. Indicate the number of contracts required and whether the position to be taken is short or long.

• A) 114 contracts short
• B) 114 contracts long
• C) 60 contracts short
• D) 60 contracts long
• E) 55 contracts long

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Definitions:

Correlation Analysis

The study of how variables are related and the measurement of the strength and direction of this relationship.

Linear Relationship

A type of relationship between two variables where a change in one variable is associated with a proportional change in the other variable.

Independent Variables

Variables in an experiment or model that are manipulated or varied to observe their effects on dependent variables.

Regression Analysis

A statistical method used to examine the relationship between a dependent variable and one or more independent variables.