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On September 10, 2009, U.S. Treasury Bonds futures for Dec 2009delivery was traded at 116-20 at CBOT. On September 13, the futureswas traded at 114-29. You opened your position by taking 10 longpositions on the T-bond futures on Sept 10. As of Sept 10, theinitial margin is $4,995 per contract and the maintenance margin is$3,700.

i) Calculate your gains (losses) on your position as ofSeptember 13.

ii) What is the highest price at which you will be required todeposit funds to your margin account (a margin call)?

iii) Would you have faced a margin call on September 13? If so,what is the amount to deposit?

Dec 2009 T-Bond Futures Price
9/10/2009 116-20
9/13/2009 114-29
Initial margin $ 4,995
Maintenance margin $ 3,700
No of contracts 10

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Patrina Schowalter
Patrina SchowalterLv2
28 Sep 2019

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FIN36058 EXAM III NAME:
PROBLEMS
I. (15 points) You have purchased a call option contract on Smith & Smith common stock. The option contract is for 100 shares. The option has an exercise price of $43.00 and S & S’s stock currently trades at $40.00. The option premium is quoted at $2.00.
a. If S & S’s stock price rises to $44.00, while you exercise the option? Calculate your net profit/loss on the option contract if (5 points).
b. If S & S’s stock price rises to $48.00, while you exercise the option? Calculate your net profit/loss on the option contract if (5 points).
c. If the stock price rises to $42.00, would you exercise or not exercise the option and what would be your gain or loss (3 points)?
d. You will make a profit on the option if the S & S stock price rises above what amount (2 points)?
To earn a profit, you must recoup the price you paid for the call, plus the exercise price:
II. (13 points) Green Backs Bank wishes to take a position in Treasury bond futures contracts, which
currently have a quote of 96-240. Green Backs thinks interest rates will go down over the period of
investment.
a. Should the bank go long or short on the futures contracts (3 points)?
b. Given your answer to part (a), calculate the net profit to Tree Row Bank if the price of the futures
contracts increases to 99-160 (5 points).
c. Given your answer to part (a), calculate the net profit to Tree Row Bank if the price of the futures
contracts decreases to 94-080 (5 points).
III. (20 points) The financial statements for MHM Bank (MHM) are shown below:
a. Calculate MHM’s total operating income (3 points).
b. Calculate MHM’s asset utilization ratio (3 points).
c. Calculate MHM’s ROA (3 points).
d. Calculate the dollar value of MHM’s earning assets (3 points).
e. Calculate the dollar value of MHM’s interest-bearing liabilities (3 points).
f. Calculate MHM’s spread (3 points).
g. Calculate MHM’s net interest margin (3 points).
h. Calculate MHM’s interest expense ratio (3 points).
Balance Sheet MHM Bank
Assets
Liabilities and Equity Cash and due from banks $ 8,200 Demand deposits $ 35,600
Demand deposits at other FIs
9,100
Small time deposits
32,900 Investments 9,600 Jumbo CDs 12,000
Federal funds sold
9,400
Federal funds purchased
3,300 Loans (less reserve for loan losses of 10,400) 74,800 Other liabilities 16,200
Premises
8,900
Equity
20,000
Total assets
$
120,000
Total liabilities/equity
$
120,000
Income Items for MHM Bank
Interest income
$ 9,380 Interest expense 3,856
Provision for loan losses
7,800 Noninterest income 6,044
Noninterest expense
4,300 Taxes (credit) - 132

6. Institutional portfolios can take advantage of what is called "portfolio margining" under the rules of the CBOE and other options exchanges. What IS portfolio margining? Choose only one answer.

A. You only pay attention to the bottom margin of the portfolio.

B. Great leverage is possible, as the intercorrelations and natural offsets (or what we call in English a "wash") are taken into consideration.

C. No margin is required, because these are not individual investors.

7. What does the symbol ^VVIX mean?

A. Apple's volatility.

B. An exchange-traded (ETF) volatility fund.

C. The implied volatility of the VIX options themselves.

8. An example of purchasing a "real" option is a company's opening of a Shanghai office, in order to have the capacity to pursue business in China.

True

False

9. A hedge fund is "short" a portfolio of VIX call options. It's "theta" is $16,788 per day. This means, barring some big market or political or terrorist event, the fund's net asset value will increase by about $16,788 per day.

True

False

10. Imagine an equity-oriented state pension fund (such as the State of Maryland Pension funds). Suppose their equity portfolio is NOT identical to the S&P 500 index. Further, suppose that due to a state budget shortfall, the year's additions to the pension fund are likely to be less than actuarially sound. Thus, the fund is becoming very risk-averse. And it needs to implement this feeling by hedging. CHOOSE THE BEST ANSWER, even though there might be more than one true answer. This is actually a question about hedge ratios. A. If the equity portfolio's beta is close to 0, then they could decide to match the overall exposure, via S&P Index futures contracts, to the fund's value. That is, # of contracts times the contract multiplier times the index would approximately equal the value of the fund.

B. If the equity portfolio's beta is close to .4, then they would have a tough time using S&P 500 contracts, so they would instead use foreign exchange contracts.

C. If the equity portfolio's beta is close to 1, then they could decide to match the overall exposure, via S&P Index futures contracts, to the fund's value. That is, # of contracts times the contract multiplier times the index would approximately equal the value of the fund.

11. Go to CMEGROUP.COM We are going to hedge ULSD https://en.wikipedia.org/wiki/Ultra-low-sulfur_diesel for a railroad, that uses ultra-light diesel fuel. Choose June 2017 as the underlying future. Let's pretend we are buying ten futures contracts. What would ten contracts cost you, using the last trade as our price? Show your math, i.e., #gallons times price per futures contract. Is this contract in contango, or normal backwardation?

12. Long options positions(long does not mean long-dated) have positive gamma, and short positions have negative gamma.

True

False

13. In valuing credit default swaps, one must estimate default probabilities. A start would be to obtain historical data for default rates from rating agencies such as Standard & Poor's. But a more complete risk profile, or risk prediction, limiting ourselves to the US market (US-based companies) would be to [pick only one choice, the best one, in your opinion]:

A. Also consider the risk of another earthquake in Japan.

B. Also consider the systematic risk associated with an economic downturn in the US, accompanied by a downturn in US stocks.

C. Also consider the possibility that Facebook options are trading at an implied volatility that is not as high as it should be, considering the lofty level of its P/E ratio.

14. A total return swap can be a form of financing vehicle to allow an investor to buy a specific bond, because: (there are two correct answers, you must pick two)

A. The payer (a financial institution) could agree to pay the bond's capital appreciation or depreciation, plus the interest payments, in return for receiving LIBOR plus some basis points.

B. The payer (a financial institution) could agree to receive the bond's capital appreciation or depreciation, plus the interest payments, in return for receiving LIBOR plus some basis points.

C. The payer retains ownership of the bond for the life of the contract.

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