BSI Strategy

Q1: Explain how an Australian company could hedge its net USD receivable using a BSI money market
hedging strategy. Illustrate your answer based on the company having a USD1 million payable in 180
days.

Spot rate

AUD/USD 0.5535 - 70

Money market rates

- Australia

5.50% p.a.

- USA

3.25% p.a.

Q2: Company B has a U$500,000 payable in 1 year from today. Base on the following data, create
a BSI money market hedge to cover the USD payable:
Spot rate:

AUD/USD 0.7520- 55

Money market rates quotations:

5% - 6% p.a in the USA

7% - 8% p.a in the Australia

Future Contracts
A business plans to invest approximately $20 million in 90-day bank bills in six months time. The
business does not have a view on what is likely to happen to interest rates during the next six
months, but it would be very satisfied if it could invest at the rate prevailing at present.

Using the following data, show how bank-accepted bills futures contracts can be used to hedge the
interest-rate risk that the business currently faces. Show the timing of all transactions and cash
flows (ignore transaction costs and margin requirements).
Todays data:
(i)

current 90-day bank bill rate 8.5% per annum

(ii)

bank-accepted bills futures contract 91.25

Data in six months:

(iii)

90-day bank bill rate 10.75% per annum

(iv)

bank-accepted bills futures contract 88.75

Also calculate the profit/ loss in physical market and futures market and explain why the profit /
loss in the futures market does not perfectly offset the loss/ profit in the physical market. Assuming
365 days a year.

A business is to rollover an existing $1 million bill debt facility in three months and is concerned
that interest rates may rise before the rollover date. Using the following data, structure a hedging
strategy, and answer question (i) to (iv)
Todays data:
(a)
90-day bank bill rate is 7.5% per annum
(b)
SFE bill futures contract quoted at 91.50
Data in three months time:
(c)
(d)

90- day bank bill rate is 10.00% per annum

SFE bill futures contract quoted at 89.90

Show how bank accepted bill can be used to hedge the interest rate risk that the company
currently faces. Show the timing of all transactions and cash flows (ignore transaction costs and
margin requirements).

Options
Q1: An investor enters into a long call option on Santos Limited shares, with an exercise price of
$7.25 per share in two months, and pays a premium of $0.70 per share.

Calculate the break-even amount for the short call position.

Draw a fully labelled diagram of the long call and the short call positions.
At what minimum stock price will the option buyer exercise the option?

Q2: A funds manager is holding a large number of National Bank Limited shares in an
investment portfolio and wishes to protect the value of the investment. The manager buys a long
put option with an exercise price of $30.55 per share, and pays a premium of $2.35 per share.

By entering into this options strategy, explain whether the funds manager will exercise
the option if the spot price is above or below the exercise price.
Calculate the break-even amount for the long put position.
Draw a fully-labelled diagram of the long put and the short put positions.

Swap:
Q1: The data below show the rates at which firm X and firm Y are able to INVEST (note that this
is invest, not borrow) in the fixed- and floating-rate markets.
Markets

Firm X

Firm Y

Fixed-rate funds

6.00%

8.00%

VNIBOR + 1.50%

VNIBOR + 0.50%

Floating-rate funds

a) Calculate the net differential

b) Identify where each firm has comparative advantage
c) Under what circumstances do the two firms wish to enter a swap (what are the different wants)?
d) If there is a swap, what are the effective rates each firm can obtain? Assuming equal sharing of
the benefit
e) Draw a diagram to show the swap strategy and to show what each firm should do.
f) Show the calculations to check if the two firms really obtain the desired investment rates

Q2: You are working at the swap desk of the treasury division of Vietcombank. Two firms X and
Y have approached the bank each seeking to enter into a $100,000 million intermediated interest
rate swap. The data below show the rate at which firms X and Y are able to borrow in the fixed
and floating- rate debt markets:
Debt markets
Fixed - rate funds
Floating rate funds

Firm X
8.25%
VNIBOR + 1.5%

Firm Y
6.5%
VNIBOR + 0.7%

Construct a swap that will benefit all parties based on the following conditions:

Vietcombank will acquire a spread of 1.5 per cent.

The beneficial gains will be allocated 70% per cent to company Y and 30% per cent to
company X.
Show your offer to the companies. Use a fully labeled diagrammatic representation to present the
construction and cash flows of the intermediated swap.

Q3: As the treasury sales executive for the National Bank, you approach two of your
multinational clients and offer to construct a currency swap that will enable both to manage their
interest rate and foreign exchange rate risk exposures on their current debt issues. Company J has
borrowed AUD14 million and company K has borrowed GBP5 million. Each wishes to swap
into the other currency. The current spot exchange rate is GBP/AUD2.8000.
Debt Markets

Company J

Company K

AUD fixed-rate funds

9.30%

9.70%

GBP fixed-rate funds

8.10%

8.80%

You indicate to the clients that any gain obtained from the swap will be split evenly between the
companies after the bank has taken a spread of 0.10 per cent.