Question
3. At year-end 2014, the balance sheet of MiniBank consisted of the following (in $000’s):
Liabilities Assets
90-day CDs maturing in January 36 Floating rate monthly mortgages, maturing 11/15/2015 30
90-day CDs maturing in February 32 Fixed rate monthly mortgages, maturing 7/1/2017 32
90-day CDs maturing in March 25 Fixed rate bond, semi-annual coupon, maturing 1/1/2018 36
1-yr CDs maturing in April 16 Fixed rate bond, semi-annual coupon, maturing 7/1/2015 37
1-yr CDs maturing in May 15 Floating rate bond, semi-annual coupon, maturing 4/1/2016 43
1-yr CDs maturing in June 10
1-yr CDs maturing in July 8
1-yr CDs maturing in August 12
1-yr CDs maturing in October 10
1-yr CDs maturing in December 5
Total Liabilities 169 Total Assets 178
a. What are the Earnings at Risk for the year 2015 for MiniBank?
b. What is the cumulative gap at 6 months?
6. Company A is planning to borrow $10 million for 10 years, and has received quotes for issuing a fixed rate bond with semi-annual coupons at 3.2% per annum or a floating rate bond with semi-annual coupons at LIBOR plus 20 basis points. Company B is also planning to borrow $10 million for 10 years, and has received quotes for issuing a fixed rate bond with semi-annual coupons at 4.1% per annum or a floating rate bond with semi-annual coupons at LIBOR plus 40 basis points. Company A would prefer to borrow at a floating rate, while company B would prefer to borrow at a fixed rate. Swapmakers Intermediaries LLC will arrange interest rate swaps for 10 basis points per annum on the notional principal. As an officer of Swapmakers Intermediaries, propose an interest rate swap that will benefit both Company A and Company B equally. Specify the cash flows that will take place periodically during the deal, as well as the cash flows at the beginning and end of the deal. What is the net rate of borrowing for each company?
7. You buy a put option maturing in September on 100 shares of GM stock with a strike price of $37 per share for $2.47 per share and a call option maturing in September on 100 shares of GM stock with a strike price of $40 per share for $1.74 per share.
a. What is this strategy called?
b. For what stock price range on the maturity date will you make a profit on this combination?
c. What is the maximum loss you are exposed to?
d. For what stock price range on the maturity date will you sustain your maximum loss?
12. A stock is currently trading at $103.25/share. You write two European put options for 100 shares each maturing in five months at a strike price of $97.50/share for $2.50/share.
h. For what stock price range on the maturity date will you make a profit?
i. What is the maximum profit you can make?
j. For what stock price range on the maturity date will you make your maximum profit?
k. What is the maximum loss you are exposed to?
l. For what stock price range on the maturity date will you sustain your maximum loss?
Solution Preview
This material may consist of step-by-step explanations on how to solve a problem or examples of proper writing, including the use of citations, references, bibliographies, and formatting. This material is made available for the sole purpose of studying and learning - misuse is strictly forbidden.
3)a. What are the Earnings at Risk for the year 2015 for MiniBank?
Earnings at risk here is the difference between the total interest earned and the total interest paid by the company. Since the yields are not given here, it has been expressed as equation: Total interest earned on assets – Total interest on liabilities...