Question 1 (Interest Rate Futures)
- It is March 10, 2011. The cheapest-to-deliver bond in a December 2011 Treasury bond futures contract is an 8% coupon bond, and delivery is expected to be made on December 31, 2011. Coupon payments on the bond are made on March 1 and September 1 each year. The term structure is flat, and the rate of interest with continuous compounding is 5% per annum. The conversion factor for the bond is 1.2191.
The current quoted bond price is $137. Calculate the quoted futures price for the contract.
Question 2 (Interest Rate Futures)
-Assume that a bank can borrow or lend money at the same interest rate in the LIBOR market. The 90- day rate is 10% per annum, and the 180-day rate is 10.2% per annum, both expressed with continuous compounding. The Eurodollar futures price for a contract maturing in 91 days is quoted as 89.5. What arbitrage opportunities are open to the bank?