Some Problems on Interest Rate Futures

1. A company buys a government bond with a coupon rate of 10% and maturity of
5 years assuming there is little risk in buying a government bond with a relatively low
maturity. The interest rate future is selling in the market for 100 handles. In case the
market rate of interest falls to 6%, what would be the market price of the bond?

The company is worried that the coupon rate far exceeds the current market rate of
interest and if he had bought the interest rate futures the interest the company would have
paid is far less. If the total size of the bond purchased is $ 5 million, how much interest
payment would the company have saved over a five year period if the price of the interest
rate future has climbed to 116-30?

2. The interest rate future of a bond is selling at 110-24. A speculator buys 10 contracts of
the interest rate future. In the meantime the interest rate rises in the market place and the
price of the future falls to 94-20. How much money has the speculator lost or gained in
the process?

3. The interest rate future of a bond is selling at 78-10. A speculator buys 10 contracts of the
interest rate future. In the meantime the interest rate in the market falls drastically and
the price of the future rises to 114-6. How much money has the speculator lost or gained
in the process?

4. A company buys a government bond with a coupon rate of 6% and maturity of 5

years, assuming there is little risk in buying a government bond with a relatively low
maturity. The interest rate future is selling in the market for 100 handles. In case the
market rate of interest rises to 8%, what would be the market price of the bond?

The company sells interest rate futures for the total size of the bond purchased which is $
10 million, how much additional money would the company have lost or gained in the
process if the price of the interest rate future falls to is 88-8. If the company decided to
buy back the interest rate futures through a reverse trade, would it have any further
obligation remaining? Discuss.

5. A carpet exporter sells to a German buyer. The price he quotes is Euro 65 per sq. m. The
Euro to US$ rate is $1.5. The $ NR conversion rate is 1 $ = Rs. 90. In case the
contribution per sq. M is 30% of the selling price, how much contribution does the carpet
exporter have if he ends up selling 50,000 sq. M?

However because of the crisis in the Euro zone, the value of the Euro falls to US $1.25
while the price of the NR vs the US $ rises to 1 $=Rs. 92. Calculate the fall in
profitability in the scenario given. If he could buy or sell the Euro US $ futures in the
world markets, how would he go about hedging. Explain the results and the impact on
profitability.

6. A German buyer wants to buy an expensive equipment from the US but is worried that
the US $ might get stronger between the time he places the order and the actual delivery
of the equipment over a period of 6 months. The price of the equipment is $ 15,000,000
and the current conversion rate is 1Euro = $1.3 or 1 US $ = 0.7692 Euro.

What would be the cost of the equipment in Euro $ in case the conversion rate falls
systematically to 1.25 and 1.2? How do you think he should hedge such that the cost in
terms of the Euro remains the same? One contract of the Euro to $ futures is Euro
100,000 and the $ to Euro contract is $ 100,000.