90.2K

Verified Solution

Link Copied!

QUESTION TWO You observe the market prices of 3 Month Sterling Futures (E500,000 points of 100% ) a) Three month Sterling Libor is currently 0.75%. If three month Sterling futures are priced as above, what does this tell us about expectations of future rates of Sterling interest? [4 marks] b) On 31 March 2020 you will have E6,000,000 cash to deposit for three months. You wish to use Futures to hedge your risk. Which contract will be the best hedge? How many Futures contracts should you buy or sell? [4 marks] c) What do you expect the 3 month Sterling interest rate to be for the period 31 March 2020 to 30 June 2020 ? Calculate your profit or loss on both your Futures position and your deposit compared to what you expect, if 3 the month Sterling interest rate for the period 31 March 2020 to 30 June 2020 is actually: i) 1.0% ii) 2.0%. [8 marks] d) Explain the key difference between Futures and Forward Contracts and the advantages and disadvantages of each. [4 marks] [Total 20 marks] QUESTION TWO You observe the market prices of 3 Month Sterling Futures (E500,000 points of 100% ) a) Three month Sterling Libor is currently 0.75%. If three month Sterling futures are priced as above, what does this tell us about expectations of future rates of Sterling interest? [4 marks] b) On 31 March 2020 you will have E6,000,000 cash to deposit for three months. You wish to use Futures to hedge your risk. Which contract will be the best hedge? How many Futures contracts should you buy or sell? [4 marks] C) What do you expect the 3 month Sterling interest rate to be for the period 31 March 2020 to 30 June 2020? Calculate your profit or loss on both your Futures position and your deposit compared to what you expect, if 3 the month Sterling interest rate for the period 31 March 2020 to 30 June 2020 is actually: i) 1.0% ii) 2.0%. [8 marks]

Answer & Explanation Solved by verified expert

See Answer