9 - Managing Interest Rate Risk

Question 1

of contracts for IR futures/options

Answer 1

contracts = Amount borrowed/size of contract x Period of borrowing/3 months

Question 2

Factors that affect the intrinsic value of an option

Answer 2

Market price:

Increase - Call price goes up, Put goes down

Exercise price:

Increase - Call price goes down, Put goes up

Question 3

Factors that affect time value (TV) of an option

Answer 3

Time to expiry increases:
- Call TV goes up, Put TV goes up

Volatility increases:
- Call TV goes up, Put TV goes up

Interest rate increases:
- Call TV goes up, Put TV goes down

Question 4

Value of an option

Answer 4

Time value + Intrinsic value

Question 5

Number of contracts - IR products

Answer 5

Loan size/standard contract size x loan duration/3 months

Question 6

Number of contracts - Index products

Answer 6

Value of portfolio/Exercise price x £10

Question 7

Future/Option initial position if borrowing

Answer 7

Sell futures/buy Puts

Question 8

Future/Option initial position if lending/depositing

Answer 8

Buy futures/buy Calls

Question 9

Calculate premium or gain/loss - IR option

Answer 9

% x size of contract x # of contracts x 3/12

Question 10

Calculate premium or gain/loss - Index option

Answer 10

Points per table x £10 x # contracts

Question 11

Future/Option position if concerned about value of portfolio falling

Answer 11

Sell futures/buy Puts

Question 12

How to treat premium on option if overdraft is mentioned

Answer 12

Company will need to borrow to pay premium, so add interest for period of option @borrow rate