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(4 points)
Alternative solution:
Macaulay Duration:
y
y 1
D
+
Modified Duration:
9 . 12
0775 . 0
1
y
1
y 1
D
D
mod
+
(4 points)
a3)
The price P of the perpetual bond can be approximated as follows (y stands for yield):
( ) 99 . 9 % 1
% 25 . 4 % 50 . 3 1
9 . 13
42 . 77 y
y 1
D
P P
+ +
+
As a result, the new price stands at 77.42 + 9.99 = 87.41 (4 points)
a4)
Linear approximations of non-linear bond prices are only reliable for small parallel yield
changes. A spread tightening of 100 bps is not small, i.e. the approximation is in this case not
reliable and too conservative. The exact bond price after spread tightening amounts to 88.89
as opposed to the above approximated 87.41.
89 . 88
% 1 % 75 . 7
6
y
CF
P
(5 points)
ACIIA
,
_
,
_
+
+
(5 points)
b4)
- Investors expecting a call might be reluctant to provide the bank with funding in the future
(reputational risk)
- Similar bond issues might decrease in value due to a non-call decision which could upset
market participants who are invested in other bonds issued by the bank
- The bank might enjoy an excess regulatory capital and liquidity position and could
therefore only be interested in minimizing the interest expenses at a lower balance sheet
volume and shorter average tenor on the liability side
- The new coupon after step-up from 5% to 6% p.a. could be higher than the costs for
shorter term liquidity which could still be sufficient from a liquidity risk perspective
- The non-call decision could be perceived by the market as a sign of weakness in terms of
the bank not being able to raise the liquidity (and/or new regulatory capital) needed for
redemption
(2 points for each bullet, max 4 points)
ACIIA
+
+
+
+
(4 points)
b)
A currency swap is the exchange of one currency against another one at a determined price
and to buy back the same amount of currency at a future date at a given price. The price
difference expressed in pips or basis points show the interest rate differential between these
two currencies from the spot to the forward date. As in this case both are equal, the spot and
the forward/future price match, because both currencies bear the same interest rate. (5 points)
c)
152
000 , 125
000 , 000 , 20
95 . 0
Q
N
HR N
f
s
f
contracts or 19,000,000 EUR (4 points)
A failure to adjust the hedge ratio after the interest rate shock would mean that the position is
now no longer optimally hedged and the risk of the position will be higher than it would be in
the case where the post shock hedge ratio is used. (3 points)
d)
( )
( )
( )
1
R 1
R 1
F
1 2
1
1
2
2
t t / 1
t
t , 0
t
t , 0
2 t , 1 t
1
1
]
1
+
+
( )
( )
( )
% 1 1
015 . 0 1
0125 . 0 1
USD
360 / 180 360 / 360 / 1
360 / 180
360 / 360
1
]
1
+
+
(2.5 points)
( )
( )
( )
% 2 1
015 . 0 1
0175 . 0 1
EUR
360 / 180 360 / 360 / 1
360 / 180
360 / 360
1
]
1
+
+
(2.5 points)
Alternative solution [using the linear convention -money market use]:
( )
1 2
1 t , 0
2 t , 0
t , t
t t / 1
t R 1
t R 1
F
1
2
2 1
,
_
+
+
+
+
(2.5 points)
( ) % 99 . 1 360 / 180 360 / 360 / 1
360 / 180 015 . 0 1
360 / 360 0175 . 0 1
EUR
,
_
+
+
(2.5 points)
ACIIA
(about 1%)
The weight of Al1, Al2, and Al3 should be 1%, 49%, and 50%, respectively. (2 points)
ACIIA
.
To synthesize 1 unit of put options, a position of
1980 . 0
) 0 ( S
) 0 ( F
/
) 0 ( S
) 0 ( S
P
units in the
futures is required. You must purchase 100 trading units of the put option to create a floor, so
multiplying by 100 gives a short futures position of 19.8 trading units.
(4 points)
ACIIA