QUESTIONS
1. Explain whether you agree or disagree with the following statement:
One difference between a futures and forward contract is that futures contracts are marked to market and forward contracts are not.
2. If the target duration for a portfolio is greater than the current portfolio duration, how can the portfolio manager use:
a. Treasury bond futures contracts to alter the portfolio’s duration so as to bring it in line with the target duration?
b. Interest rate swaps to increase the portfolio’s duration so as to bring it in line with the target duration?
3. With respect to Treasury bond futures contract:
a. What is the role of the conversion factors?
b. What is the significance of the cheapest-to-deliver issue for a Treasury bond futures contract?
c. How is the cheapest-to-deliver issue determined?
4. In determining the theoretical price of a Treasury bond futures contracts, explain why it is necessary to modify the standard cost of carry model.
5. When the buyer of a call option on a futures contract exercises, explain the resulting position for the buyer and the writer.
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