Practice Questions

Boot Strapping and Duration

Yes Bank has issued Green Bonds with following information.

Total size of the bond portfolio is 1000 crore. Face value is Rs 1000, Issued at 10% discount,
Time of Maturity 5 years, Coupon 12% per annum, Coupon paid at annual frequency, Redeemed
at 10% premium and current market price is Rs 900. The calculated duration of the green bond is
3.6 assume.

Investors have following synthetic strips available in the market.

Year of Bond Principal Coupon Bond Price

Maturity
1 100 0 90
2 100 0 82
3 100 0 74
4 100 0 65
5 100 12 95

Answer the following questions

(a) Find Zero Rates for different level of maturity using bootstrapping method.

(b) Plot the yield curve using information of green bond

(c) If RBI Governor announces the 25 basis point rate cut, what is the likely impact on the bond
portfolio. You need not to calculate the duration. Estimated duration is given.

Marked to Margin

A cattle grower is expected to have 1200 pounds of live cattle ready to sell in three months. The
live cattle futures contract traded by the CME Group is for the delivery of 400 pounds of cattle.

Today future price of the contract = $200 per pound

Initial margin of the contract $ 8000 per contract

Maintenance margin of the contract $10000

The expected future price of next 10 days is given below.

Date Future Price
Day1 202
Day2 203
Day 3 204
Day4 205
Day5 204
Day6 202
Day7 210
Day8 212
Day9 216
Day10 220

What is the future price for margin call?

At what future price the cattle grower can withdraw $10000 from margin account.

Beta Hedging

It is July 16. A company has a portfolio of stocks worth $100 million. The beta of the portfolio is
1.2. The company would like to use the CME December futures contract on the S&P 500 to
change the beta of the portfolio to 0.5 during the period July 16 to November 16. The index
future price is currently 1,000 and each contract is on $250 times the index. What positions the
company should take? Also calculate the effect of your beta hedging strategy on the portfolio
value overall if the level of index moves from 1000 to 900 and four month future is 12% lower.

Swaps

Companies A and B have been offered the following rates per annum on a 100 lakhs rupee loan
for 5 years.

Fixed rate Floating rate

Company A 12.00% MIBOR+0.1%
Company B 14.5% MIBOR+0.9%

Company A requires a floating rate loan; company B requires a fixed rate loan. Design a swap
that will net a bank, acting as intermediary, 0.1% per annum and that will appear equally
attractive to both parties.