Question 1

Explain and demonstrate how BAB futures contracts can be used to hedge a floating-rate borrower's exposure to interest rate risk.Assume that the borrower plans to issue 90-day bank bills with a face value of $80 million under a two-year bill facility commencing next September, that September BAB futures are trading at 94.75, and that the spot 90-day bill rate in September is 5.40%.

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Question 2

What is a futures contract? How do they differ from forward contracts? Explain the positions that can be established in a futures contract and how they are used by traders.

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Question 3

Explain why it is unlikely that a hedger will achieve an effective borrowing or lending rate equal to the rate locked-in at the inception of a BAB futures hedge when the position is unwound early.

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Question 4

A fund manager plans to invest in a $40 million parcel of 90-day bills in December.Demonstrate how they can hedge the risk of an unexpected rate fall in the BBSW given December BAB futures are now trading at 96.55 and it turns out that the BBSW in December is 3.25%.

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Question 5

TDK Industries approached a bank in April to organise financing through a 180-day bank bill facility.The facility will begin in June using 90-day bank bills with a total face value of $10 million.The company wishes to know what they can do now to hedge against interest rate risk.Assume that June and September BAB futures contracts are currently trading at 95.70 and 95.30 respectively and that 90-day BBR in June is 4% and in September it is 5%.Demonstrate the effective interest rate established for the duration of the bill facility, through the use of bank bill futures contracts.

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Question 6

Suppose you plan to purchase money-market securities in June, and you have hedged by taking a long position in BAB futures contracts.If the market interest rate increases (more than expected), explain whether you would be better off if you had not taken the position in the futures contracts.

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Question 7

Give an overview of three of the financial futures contracts traded on the ASX.In your answer, discuss the features of the contracts you have selected and explain how the contracts may be used by both speculators and hedgers.

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Question 8

Explain why basis risk is likely to be a problem when hedging long-term interest rates using futures contracts.

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Question 9

Provide an overview of the ASX futures market.Discuss the contracts it provides, the trading system used and the role of the clearinghouse.

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Question 10

Discuss the contributions that the futures market makes to the operation of the financial system.

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Question 11

An investor believes that the cash rate will rise (when the market expects it to be stable)and wishes to trade 10 30-day interbank cash rate futures contracts to profit from this view.If the futures prices at the start and end of the investment were 97.490 and 97.260 respectively, calculate the investor's profit or loss.

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Question 12

Demonstrate that the effective cost of funds for a $20 million 90-day bank bill issue in June is the forward rate established in April (when 20 June BAB futures are sold at 96.45), rather than the BBSW of 4.05% when the bills are issued in June.

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Question 13

Calculate the profit or loss associated with a long position in ten SPI futures contracts entered at 4931 and closed out at 4885.Recalculate if the closeout transaction was at 5000.

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Question 14

Futures contracts can result in significant losses for traders.Explain how the market manages default risk.In your answer refer to the initial margins currently required by the ASX (Table 13.2)and comment broadly on how these margins are determined.

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Question 15

Explain why a fund manager might sell December Share Price Index (SPI)futures in the month of August?

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Quiz 13: Financial Futures