[4] Investment banks as traders (20 points) 4.1. Short-term interest rate future

Question

[4] Investment banks as traders (20 points) 4.1. Short-term interest rate futures. Three months ago, Bank C bought 170 contracts of September 2018 short-term interest rate futures at a price of 98.20. The contract expires today, and the spot short-term interest rate is 2.35%. Answer with True or False: a. Total profit USD 233,750 b. Profit per contract USD 1,375 c. Total loss USD 233,750 d. Loss per contract USD 1,375 [5 points per correct answer) 4.2. CDS compensation. Hamilton Ltd has just defaulted on its bonds. On 18 September 2018, a credit event is declared for CDS referenced to its bonds. The total value of protection sold by protection sellers is £1.7 billion. QUESTION: calculate the amount of compensation (in pounds) that protection sellers will have to pay, knowing that the bond used in the computation is a 55% fixed- coupon bond maturing on 18 September 2028, On the day of the credit event, it traded at a 27.12% yield or rate of return. [3 points for bond valuation, 7 for compensation]

Explanation / Answer

The answer is True as there would be no differential profit/loss arising at the maturity date of contract.

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