Page 146 - DMGT513_DERIVATIVES_AND_RISK_MANAGEMENT

Unit 10: Interest Rate Derivatives and Euro-Dollar Derivatives

10.7 Keywords Notes

Duration: Duration is a measurement of how long, in years, it takes for an investment in a bond
to be repaid by its internal cash flows.

Interest-rate Futures: Interest-rate futures are contracts of the future delivery of interest-bearing
securities (debt).
Invoice Price: Invoice price is the price paid out by the buyer of the futures to the seller of futures
for taking physical delivery of the bond.
Modified Duration: Modified Duration is a measure of the sensitivity of a bond's value to the
absolute change in its yield.
T-bills: T-bills are money market instruments to finance the short term requirements of the
Government of India.
10.8 Review Questions

1. Discuss the evolution of interest rate derivatives in India.
2. Eurodollar futures work the same as T-bill contracts except the rate is based on LIBOR.
Discuss.
3. A FRA is a forward contract between two parties to exchange interest payments for a
notional principal amount for a specified future period. Discuss.

4. Illustrate the computation of duration with a suitable example.
5. Discuss the meaning and role of convexity.
6. T-bill Futures prices are quoted relative to an index value. Explain with suitable example.
7. Illustrate the concept of Euro-dollar derivatives with suitable example.
8. State the difference between Macaulay duration and Modified duration.

9. What is the duration of a bond for which 4.92% change in the bond price corresponds to
1.20% change in the bond's yield?
10. What is the duration of a bond for which 5.50% change in the bond price corresponds to
1.10% change in the bond's yield.

Answers: Self Assessment

1. Interest-rate 2. International Monetary Market (IMM)
3. index 4. quoted

5. higher 6. LIBOR
7. LIBOR 8. cash
9. 360 10. notional principal
11. interest 12. Macaulay

13. Modified 14. price-yield
15. second

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