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Assignment 1&2

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16 views

Assignment 1&2

Uploaded by

abeeraafzal45
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as DOCX, PDF, TXT or read online on Scribd
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Question No.

Describe the following terms

Derivatives Forward contract


Future contract Options
Call options Put options
SWAPS Interest rate swaps
Currency swaps Deliverable contract
Cash settlement contract Hedge
Speculation Short sale
Arbitrage Financial system
Capital market Money market
Dealer Broker
Credit Default SWAP Forward commitment
Contingent claim Convenience yield
Forward rate agreement

Question No. 2
Alpha bank makes a forward contract of buying 2,000 shares of Acme Company at a forward
price of $50 per share. Calculate the profit of both long at short at maturity if settlement price at
maturity are 55, 62, 50, 47 and 40.

Question No. 3
Suppose a Future contract for 100 ounces of gold that settles on June 15. The initial margin
amount is $6,000 and the maintenance margin is $5,200. The contract price is $ 2,200 at day 0.
Calculate the profit and margin of both long and short if the price of the gold is as:
a) 2,350 at day 1, 2,500 at day 2 and 2,050 at day 3.
b) 2,150 at day 1, 2,000 at day 2 and 2,270 at day 3.

Question No. 4
In order to hedge the interest rate risk investor X makes a simple 2 years quarterly interest
payments, fixed-for-floating interest rate swap of $ 10 million at 8% swap rate. Investor X’s
position is fixed rate payer. Calculate the payments of both the parties if the quarterly floating
interest rates are 9.5%, 8.75%, 8%, 7%, 6.8%, 6.5%, 7.9% and 11%.

Question No. 5
Suppose that a call option has been written on a stock with an exercise price of $50. The current
stock price is $55, and the call premium is $5.
Calculate the payoff and profit to the long and short positions for the call under different
scenarios if at expiration day the stock price is $58, 59, 50, 47 and 40.

Question No. 6
Suppose that a put option has been written on a stock with an exercise price of $50. The current
stock price is $55, and the put premium is $5.
Calculate the payoff and profit to the long and short positions for the put under different
scenarios if at expiration day the stock price is $58, 52, 50, 44 and 40.

Question No. 7
A. Consider a stock index trading at $1,550 with a dividend yield of 2.5% (continuously
compounded rate) when the risk-free rate is 5% (continuously compounded rate).
Calculate the no-arbitrage 6-month forward price of the stock index.

B. Consider an underlying asset is trading at $2,550 with a present value of benefit is $ 100
and present value of cost is $150 when the risk-free rate is 4% Calculate the no-arbitrage
4-month forward price of the stock index.

C. Consider a situation at t = 0 where the risk-free rate in euros is 5%, the risk-free rate in
U.S. dollars is 3%, and the current USD/EUR exchange rate is 5.5. Calculate the 6 month
USD/EUR forward currency exchange rate also determine the euro discount or premium
in the forward market.

Question No. 8
From the following spot rates calculate 1y1y, 2y1y, 1y2y and 2y2y:
S1= 4%, S2=7%, S3= 10% and S4=12%.

Question No. 9
Calculator the price of a 1x4 FRA, the current 30 days LIBOR is 5% and 120 days LIBOR is
6%.
a) Calculate the value of above 1x4 FRA at maturity if 90 days LIBOR at maturity is 7.5%
assuming $ 1 million notional amount.
b) Calculate the value of above 1x4 FRA 20 days after initiation if 10 days LIBOR is 4.8%
and 100 days LIBOR is 5.7% respectively.

Question No. 10
Calculate the no arbitrage forward price of 100-day forward contract of a stock that is currently
price at $100 and is expected to pay dividend $ 4 in 10 days, $5 in 90 days and $ 6 in 180 days.
The annual risk free rate is 6%.
a) Calculate the value of contract at maturity if the price of stock at maturity is $ 110.
b) Calculate the value of the above mentioned equity forward contract after 60 days if the
price of the stock is $105.

Question No. 11
Calculate the price of a 200-day forward contract on an 8% US Treasury bond with a spot price
of $1,080 next coupon will be paid after 183 days. The risk free rate is 6%.
a) Calculate the value of contract at maturity if the price of bond at maturity is $955.
b) Calculate the value of the above mentioned forward contract after 90 days if the price of
the bond is $1,050.

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