Mod - 4 - Using Interest Rate Futures

[Jin Yoong]

This question is from "MID-WEEK TEST FOR MODULE 4 - FUTURES
CONTRACT" (the file is mod4_2.doc)

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KLIBOR RATE :
1 MONTH: 7.00 6 MONTH: 7.20
2 MONTH: 7.10 9 MONTH: 7.25
3 MONTH: 7.20 12 MONTH: 7.25

3-MONTH KLIBOR FUTURES PRICES :
JUNE CONTRACT : 92.80
DECEMBER CONTRACT : 92.98
SEPTEMBER CONTRACT : 92.90
MARCH CONTRACT : 93.03

Fund manager STR will be receiving RM 100 million in September for 6
months and he is afraid of falling interest rate.

a. What should he do?

b. On 18/9/96, if the 3 & 6 month KLIBOR is 5.50% and the DEC FUTURE
is 94.57, at what
rate he can place his funds and what is the return of the funds?

c. On 18/9/96, if the 3 & 6 months KLIBOR is 7.75% and the DEC FUTURE
is 92.40, at what
rate can he place his funds and what is the return of the funds?

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(a) Ans: buy 100 SEPT futures contracts @ 92.90 &
buy 100 DEC futures contracts @ 92.98.

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(b) Ans: Placement at 5.50% & R = 7.14% ]

To work out the R, first determine the gains/losses on the above
futures contracts.
On 18/9/96 the SEPT futures should be valued at 94.50. This is because
the 3 month KLIBOR is 5.50%.

Hence the Profit as a result of the following:
Buy 100 SEPT K @ 92.90
Sell 100 SEPT K @ 94.50
Profit of 160 ticks = 100 x 160 x 25 = RM 400,000

The DEC contract is quoted at 94.57.

Hence the Profit as a result of the following:
Buy 100 DEC K @ 92.98
Sell 100 DEC K @ 94.57
Profit of 159 ticks = 100 x 159 x 25 = RM 397,500

So on 18/9/96, you will have a total of RM100mio + RM400,000 +
RM397,500
= RM 100.7975 mio

Placing this in at 5.5% for 6 months will give a total return of
= 100.7975 (1 + 5.5x6/1200) mio
= 103.569431 mio

To get R, solve the following:

103.569431 mio = 100 mio x (1+Rx6/1200)
R = 7.1388 % or 7.14%

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(c) Ans: Placement at 7.75% & R = 7.11%.

Try to work out the same for this. I am now too tired and lazy to type
this one out :P

But let me know if you have problems.

Jin Yoong