Professional Documents
Culture Documents
Uttar Pradesh
India 201303
ASSIGNMENTS
PROGRAM: MFC
SEMESTER-IV
Subject Name :
Study COUNTRY :
Roll Number (Reg.No.) :
Student Name :
INSTRUCTIONS
a) Students are required to submit all three assignment sets.
Signature : _________________________________
Date : _________________________________
QI. “A swap bank has to entail certain risks which are inherent to the swap
business and are interrelated” Explain the risks involves in swap business.
Q2. Call options are said to be “At the money “, “In the money” and “Out of the
money” depending on whether the exercise price is equal to or less than or greater
than the current market price of the stock. In case of Put options, the opposite is
true. Explain when a trader realizes profits in case of Call as well as Put options
with the help of simple examples.
Q5. “Arbitrage profits” an investor told are risk less profits. You take simultaneous
but opposite positions in two markets to reap gains from pricing disparities. Acting
on this belief, his friend tried to find the arbitrage profit by trading simultaneously
in futures and stock index.
Required
(a) Find arbitrage profits, if any.
(b) Discuss the risks associated with arbitrage transactions in futures.
ASSIGNMENT B
Q1. The following are the requirement of the type of funds and the borrowing rates
faced by three companies X, Y, Z in different markets:
Company Requirement LIBOR Rate T-Bill rate Fixed $
X LIBOR based funds LIBOR+.75% T-Bill+.4% 5%
Y T-Bill Based Funds LIBOR+.5% T-Bill+.25%4.5%
Z Fixed $ LIBOR+1% T-BILL+.5% 5.5%
Three companies approach a bank individually for swap deals so that they can
reduce their cost of borrowing. You are required to structure swap transactions
between three
parties keeping Bank as an intermediary so that after keeping a margin of 10 basis
points V by the Bank for each leg of swap, the rest of the gain is distributed
equally between the three parties. Also, calculate the effective cost of borrowing to
the three parties.
Q2. There are a variety of option combinations which traders adopt to suit their
risk return profile”. Discuss the following option combinations:
(1) straddle (from pge 172)
(2) strangle (from pge 174)
A trader is looking at the above options and planning to adopt long strip or long
strap strategy to make profit from the rupee-dollar exchange rate volatility.
6. Hedging involves:
(a) - taking a futures position opposite to one's cash market position.
(b) - taking a futures position identical to one's cash market position.
(c) - holding only a futures market position.
(d) - holding only a cash market position.
(e) - none of the above.
7. Margins in futures trading:
(a) - serve the same purpose as margins for common stock.
(b) - limit the use of credit in buying commodities.
(c) - serve as a down payment.
(d) - serve as a performance bond.
(e) - are required only for long positions.
10. Futures trading gains credited to a customer's margin account can be withdrawn by the
customer:
(a) - as soon as the funds are credited.
(b) - only after the futures position is liquidated.
(c) - only after the account is closed.
(d) - at the end of the month.
(e) - at the end of the year.
11. Graylon, Inc., based in Washington, exports products to a German firm and will receive
payment of €200,000 in three months. On June1, the spot rate of the euro was $1.12, and the 3-
month forward rate was $1.10. On June 1, Graylon negotiated a forward contract with a bank to
sell €200,000 forward in three months.The spot rate of the euro on September 1 is $1.15.
Graylon will receive $_________ for the euros.
A) 224,000
B) 220,000
C) 200,000
D) 230,000
13. Which of the following is the most unlikely strategy for a U.S. firm that will be purchasing
Swiss francs in the future and desires to avoid exchange rate risk (assume the firm has no
offsetting position in francs)?
14. If your firm expects the euro to substantially depreciate, it could speculate by _______ euro
call options or _______ euros forward in the forward exchange market.
A) selling; selling
B) selling; purchasing
C) purchasing; purchasing
D) purchasing; selling
15. Assume that a speculator purchases a put option on British pounds (with a strike price of
$1.50) for $.05 per unit. A pound option represents 31,250 units. Assume that at the time of the
purchase, the spot rate of the pound is $1.51 and continually rises to $1.62 by the expiration date.
The highest net profit possible for the speculator based on the information above is:
A) $1,562.50.
B) -$1,562.50.
C) -$1,250.00.
D) -$625.00.
17. A U.S. firm is bidding for a project needed by the Swiss government. The firm will not
know if the bid is accepted until three months from now. The firm will need Swiss francs to
cover expenses but will be paid by the Swiss government in dollars if it is hired for the project.
The firm can best insulate itself against exchange rate exposure by:
A) selling futures in francs.
B) buying futures in francs.
C) buying franc put options.
D) buying franc call options.
18. A firm wants to use an option to hedge 12.5 million in receivables from New Zealand firms.
The premium is $.03. The exercise price is $.55. If the option is exercised, what is the total
amount of dollars received (after accounting for the premium paid)?
A) $6,875,000.
B) $7,250,000.
C) $7,000,000.
D) $6,500,000.
E) none of the above
19. The existing spot rate of the Canadian dollar is $.82. The premium on a Canadian dollar call
option is $.04. The exer¬cise price is $.81. The option will be exercised on the expiration date,
if at all. If the spot rate on the expira¬tion date is $.87, the profit as a percent of the initial
invest¬ment (the premium paid) is:
A) 0 percent.
B) 25 percent.
C) 50 percent.
D) 150 percent.
E) none of the above
20. Macomb Corporation is a U.S. firm that invoices some of its exports in Japanese yen. If it
expects the yen to weaken, it could _______ to hedge the exchange rate risk on those exports.
A) sell yen put options
B) buy yen call options
C) buy futures contracts on yen
D) sell futures contracts on yen
21. A U.S. corporation has purchased currency put options to hedge a 100,000 Canadian dollar
(C$) receivable. The premium is $.01 and the exercise price of the option is $.75. If the spot rate
at the time of maturity is $.85, what is the net amount received by the corporation if it acts
rationally?
A) $74,000.
B) $84,000.
C) $75,000.
D) $85,000.
22. Johnson, Inc., a U.S.-based MNC, will need 10 million Thai baht on August 1. It is now May
1. Johnson has negotiated a non-deliverable forward contract with its bank. The reference rate is
the baht’s closing exchange rate (in $) quoted by Thailand’s central bank in 90 days. The baht’s
spot rate today is $.02. If the rate quoted by Thailand’s central bank on August 1 is $.022,
Johnson will ________ $__________.
A) pay; 20,000
B) be paid; 20,000
C) pay; 2,000
D) be paid; 2,000
E) none of the above
23. Which of the following are true regarding the options markets?
A) Hedgers and speculators both attempt to lower risk.
B) Hedgers attempt to lower risk, while speculators attempt to make riskless profits.
C) Hedgers and speculators are both necessary in order for the market to be liquid.
D) all of the above
24. Your company expects to receive 5,000,000 Japanese yen 60 days from now. You decide to
hedge your position by selling Japanese yen forward. The current spot rate of the yen is $.0089,
while the forward rate is $.0095. You expect the spot rate in 60 days to be $.0090. How many
dollars will you receive for the 5,000,000 yen 60 days from now?
A) $44,500.
B) $45,000.
C) $526 million.
D) $47,500.
25) The annualized dividend yield on the s&p 500 is 1.40%. The continuously compounded
interest rate is 6.4%. if the 9-month forward price is $925.28 and the index is priced at 950.46$,
what is the profit/loss from a cash and carry strategy?
a. 61.50 gain
b. 25.18 loss
c. 25.18 gain
d. 61.50 loss
26) The manager of a blue chip growth stock mutual fund is trying to fully hedge the $650
million portfolio position during the last two months of the calendar year. the current price of
the S&P 500 Index futures contract is 1200. If the mutual fund has a beta of 1.24 how many
contracts will be needed to hedge the fund?
a) 541,666
b)2,686
c)242,963
d)1,083
27) Consider an investment in five S&P 500 Index futures contracts at a price of $924.80. the
initial margin requirement is 15% and the maintenance margin is 10.0%. If the continuously
compounded interest rate is 5.0% what will the futures price need to be for a margin call to occur
10 days from now? Assume no settlement within the 10 days.
a.) $852.64
b.)$905.25
c.) $898.63
d.)$872.79
28) The price of an S&P 500 Index futures contract is $988.26 when you decide to enter a long
position. When the position is closed the futures price is $930.32. If there are no settlement
requirements, what is your percentage gain or loss under a 15.0% margin requirement? (Ignore
opportunity costs)
29.Which of the following contract terms is not set by the futures exchange?
a. the price
b. the deliverable commodities
c. the dates on which delivery can occur
d. the size of the contract
e. the expiration months
30. Find the forward rate of foreign currency Y if the spot rate is $4.50, the domestic interest rate
is 6 percent, the foreign interest rate is 7 percent, and the forward contract is for nine months.
a. $5.104
b. none are correct
c. $4.458
d. $4.532
e. $4.468
31. Margin in a futures transaction differs from margin in a stock transaction because
a. stock transactions are much smaller
b. delivery occurs immediately in a stock transaction
c. no money is borrowed in a futures transaction
d. futures are much more volatile
36 Suppose you sell a three-month forward contract at $35. One month later, new forward
contracts are selling for $30. The risk-free rate is 10 percent. What is the value of your contract?
a. $4.55
b. $4.96
c. $4.92
d. $5
e. none are correct
37. Futures prices differ from spot prices by which one of the following factors?
a. the systematic risk
b. the risk premium
c. the spread
d. none are correct
e. the cost of carry
38. Suppose there is a risk premium of $0.50. The spot price is $20 and the futures price is $22.
What is the expected spot price at expiration?
a. $21.50
b. none are correct
c. $24.50
d. $22.50
e. $20.50
39.Hedgers who are short in an asset can establish the maximum price they will have to pay for
that asset by: