If you were certain that interest rates will fall sharply in the weeks ahead, explain why...

If you were certain that interest rates will fall sharply in the weeks ahead, explain why or why not you would do the following:

Buy S&P futures
Sell S&P futures
Buy Tbond futures
Sell Tbond futures
Buy puts on IBM stock
Buy junk bonds on margin
Buy Tbonds on margin

Solutions

Expert Solution

If you were certain that interest rates will fall sharply in the weeks ahead, explain why or why not you would do the following:

Buy S&P futures

No, we should not buy the S&P futures. The futures value depends on the interest rates. Higher the interest rate, higher is the futures value. Hence, if the interest rates fall, the futures price will reduce resulting in a loss.

Sell S&P futures

Yes, we should sell the S&P futures. The futures value depends on the interest rates. Higher the interest rate, higher is the futures value. Hence, if the interest rates fall, the futures price will reduce resulting in a profit.

Buy Tbond futures

Yes, we should buy the Tbond futures. As the interest rates fall, the market yield decreases leading to appreciation the bond value. Hence, buying the Tbond futures would lead to a profit.

Sell Tbond futures

No, we should not sell the Tbond futures. As the interest rates fall, the market yield decreases leading to appreciation the bond value. Hence, selling the Tbond futures would lead to a loss.

Buy puts on IBM stock

A stock movement depends on several factor. Considering only the effect of interest rate decrease, then No, we should not buy the puts on IBM stock as one of the effect of interest rate decrease would be lower cost of borrowing for IBM and higher spending by consumers on products.

Buy junk bonds on margin

No, we should not buy the junk bonds on margin. It is not advisable to buy a junk bond on margin as the behavior of a junk bond to interest rate changes is unpredictable.

Buy Tbonds on margin

Yes, we should buy the Tbond. As the interest rates fall, the market yield decreases leading to appreciation the bond value. Hence, buying the Tbond would lead to a profit.

jeff jeffy answered 1 year ago

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