125350 mid-sem test (2005)

5EFHE

Name:  ________________________________

Student Number: _____________________________

Finance 350
Answer the questions as we discussed in class. For example, use continual discounting.

Section I:  1 point each
True or false:  True = A, False=B

1.        Futures are exchange traded and forwards are not.
T

2.        Futures are standardized with regard to the asset and forwards are not.
T

3.        Forwards have a specified delivery/expiration date.
T

4.        Futures have no money exchanged up front, only at expiration.
F

5.        Forwards are settled at the end of each trading day.
F

6.        The asset is specified on a futures contract.
T

7.        The contract size is specified on a futures contract.
T

8.        The price is specified on a futures contract.
F

9.        The delivery month is specified on a futures contract.
T

10.        The risk is specified on a futures contract.
F

11.        Margin accounts are in place in futures markets to reduce risk.
T





12.        Margin accounts are in place in futures markets to reduce probability of default.
T


True or false:     True = A, False=B
13.   __F__    Duration always changes as yields change.

14.   __T__     Holding time to maturity constant, duration decreases as coupon     
                       increases.

15. __T__    In general, holding the coupon constant, duration increases with time
                   to maturity.

16. _F___    Holding all else constant, duration increases when yield to maturity
                   increases on a coupon bond.

17.        Consider the following portfolio:  Long forward price of $5, short forward price of $6 (written on the same asset, expires on the same day)




True or false: The payoff is -$1
False




18.Forwards are finite lived assets.
T

19.Given a liquid market existed for petroleum puts, Metallgesellschaft could have hedged oil futures (they used oil futures to hedge oil forwards) with puts on the underlying (oil).
T

20. Liam Neeson was responsible for Barings’ bankruptcy.
F

Section II:  3 points each

Questions 21 and 22 are tied together.

21.  Your firm has made a floating rate loan that will last two months.  At the end of each month, the interest payment will be calculated from the prevailing LIBOR + 2%.  You do not have to hedge the first month of the loan as the first payment is known today, but you do have to hedge the second (final) payment.  The loan is for $100M.

If you were to use a T-bond futures contract to hedge this, what position would you take?
a.        buy a futures contract (long) to generate revenue as IR rise
b.        buy a futures contract (long) to generate revenue as IR fall
c.        sell a futures contract (short) to generate revenue as IRs rise
d.        sell a futures contract (short) to generate revenue as IRs fall



22.  If the duration of the futures contract was 0.16667 (1/6) years, and the futures price is $950,000 on a face of $1M, then how many contracts would you use to hedge?

N = (100M*1/2) / (950,000) =  52.63  =  53 contracts

a.        50
b.        53
c.        105
d.        100









Questions 23-26 are tied together

Suppose you are a market maker and wanted to sell futures contracts on some of the items in your inventory.  Selling forwards or futures can be a risky activity.   

23. First consider what it means to sell futures on assets that you already own.  
What is the risk in this (in theory)?
a.        considerable risk from the underlying asset value
b.        considerable risk from fluctuations in the futures contract value
c.        indeterminate risk
d.        no risk


24. What is the rate of return (RR) you should have from this combination of underlying asset plus short futures?
a.        The RR applied to the underlying  asset
b.        The RR applied to the futures contract
c.        The RR of an asset with no risk premium
d.        The RR is indeterminate

25. Now suppose that you wanted to write futures contracts on assets that are not in your inventory. Given the above relations, what would you do to hedge the short futures?
a.        Short the underlying asset and invest in a t-bill
b.        Short the underlying asset and borrow funds
c.        Long the asset with borrowed funds
d.        Long the asset and long a t-bill

26. Why would this hedge?
a.        At maturity, it creates the payoff for the long futures contract
b.        At maturity, it creates the payoff for the short futures contract
c.        At maturity, it creates the payoff for the long underlying asset
d.        At maturity, it creates the payoff for the short underlying asset


Questions 27, 28 are tied together
27. Given the no arbitrage forward pricing formula that we have used in class, is it accurate to say that the forward price is a fair predictor of future asset value?
a. Yes, it is unbiased
b. No, it is biased but in an unpredictable way
c. No, it is biased and in a certain direction


28. Why?
a.        Because the forward has the same risk premium as the underlying asset
b.        Because the forward has a different risk premium than that of the underlying asset.
Questions 29-35 are tied together

29. Given that the price of most stocks (and other risky assets) tends to go up over time, would buying the forward contract be a profitable i.e. would going long on the forward on the asset inherently be a positive profits making strategy?
a.        Yes
b.        No

30. Why?
a.        Because one takes the risk of the asset into consideration
b.        Because one does not take the risk of the asset into consideration


31. Suppose that you are an investor and wanted to hold gold for investment purposes.  Would it be best to take physical possession of the gold?  Assume there is no rental income on gold.
a.        Yes
b.        No


32. Why?
a.        Because it’s better to have it than not have it
b.        Because possession of the gold always entitles one to extra returns
c.        Because possession of the gold demands extra costs


33. Assuming again that you’re an investor, an alternative to holding gold would be to
a.        Borrow money and buy a futures on gold
b.        Borrow money and sell a futures on gold
c.        Lend money on the revenues generated by selling futures on gold


34. Given the line of reasoning above, are people/firms who hold gold always irrational?
a.        Yes
b.        No


35. Why do people/firms physically hold gold?
a.        Because it’s shiny and it makes really good stereo wire and it allows you to sport your favorite body art during an MTV half time show.
b.        Because they could have a need for it and a shortage at any point in the future would cost them in real financial terms
c.        Because people usually don’t understand that there’s no good reason to hold gold



Calculate the price a bond with the following information:

        Annual 5% Treasury coupon bond with two years until maturity.  The one year risk free rate is 5% p.a., the two year risk free rate is 5% p.a..  Face value is $1000.      


36.  PV(Coupon(s)):  47.561   +   45.242   =    92.803
A.  $ 45.24
B.  $ 47.56
C.  $ 92.80
D.  $ 87.52



37.   Bond Price:
A.  $ 997.64
B.  $ 951.23
C.  $ 1141.48
D.  $ 1129.71

P  =  50 * e(-0.05)  +  1050 * e(-0.10)   =   7.561    +    950.08   =  $997.64

























38.   Assume the above price is the spot price of the instrument.  Now calculate the arbitrage free price of a one year forward on the bond (the coupon will be delivered in a year, just before the forward expires).

F   =   $ 950.08 * e(0.05)  =   $998.79
A.  $1051.27
B.  $1049.99
C.  $903.74
D.  $998.79



Assume that you have observed a forward price of $1100.
What must you do to collect profits?         









Fobs >  F afp

39.   T0:

A.Agree to buy forward @ F, at time T0, short bond and collect spot price,  invest short proceeds at rf rate 5% pa.
B. Agree to buy forward @ F, at time T0, short bond and collect spot price,  invest short proceeds at rf rate 10% pa.
C. Agree to sell forward @ F, at time T0, borrow spot price and buy bond, borrowing at rf rate 5% pa.
D. Agree to sell forward @ F, at time T0, borrow spot price and buy bond, borrowing at rf rate 10% pa.


40.   T1:  

A.  Collect $ 1146.35, buy bond @ F=$ 1100, pay back $ 50 coupon and bond.
B.  Collect $ 1046.78, buy bond @ F=$ 1100, pay back $ 50 coupon and bond.       
C.  Owe $ 1102.56, sell bond @ F=$ 1100, collect $ 50 coupon.
D.  Owe $ 1048.79, sell bond @ F=$ 1100, collect $ 50 coupon.

41.  Now calculate the duration of the above bond using the interest rates, cash flows, and the price given above.                                    


D   =   1*50 * e(-0.05)    +    2 * 1050 * e(-0.10)
                           997.641

D   =   47.561    +    1900.159
                           997.641

D   =    1.95 years

A.  1.85 years
B.  1.95 years
C.  1.72 years
D.  2.23 years



42.   Now assume that you have a portfolio of 10,000 such bonds.   Assume you have found a t-bill futures contract with half the expected duration of the above instrument.  How many contracts must be used to hedge the above portfolio?
Assume the price of the t-bill futures is $950,000 for a delivery of (face value) $1,000,000.                                                                                                              


D  =   2  *  10,000 * 997.641
                        950,000


D  =  21.0

Short 21 contracts

A.22 contracts
B.21 contracts
C.20 contracts
D.19 contracts

43.  Long or short?
A.  Long
B.  Short




Calculate the value of the following currency swap:

        Interest rates:  Japan:  5%
                            US    :  10%

Spot exchange rate:   Yen 100/$

Set-up:     A bank pays a 5% payment on Yen 1.0B ;   Receives 8% on $10M
                for 3 years (swapping once a year).  The yield curves in each country
                are flat.                                                                 

44. The Japanese “bond” is worth:
a)        $ 9.97 M
b)        $ 11.69 M
c)        $ 12.25 M
d)        $ 13.01 M


45. The US “bond” is worth:
a)        $ 6.69 M
b)        $ 7.72 M
c)        $ 8.65 M
d)        $ 9.37 M


46. The value of the SWAP in $US:
a)        $–0.6 M
b)        $-2.3 M
c)        $0.6 M
d)        $2.3 M



Bfor    = Y50*e{-0.05}(1)  +  Y50*e{-0.05}(2)  +  Y1050*e{-0.05}(3)
        = Y47.56  +  45.24  +  903.74  =  Y 996.54 M
= Yen 996.54 M / (Yen 100/ USD)  = $9.9654 M

Bus     = $0.8*e{-0.10}(1)  +  $0.8*e{-0.10}(2)  +  $10.8*e{-0.10}(3)
        = $ 0.72  +  0.65  +  8.00  =  9.37  M  
        =  $9.38M
Vswap = $9.38M  -  $9.97M  =  - $ 0.60 M





You are a bond portfolio manager and manage a treasury fund of $100M.  You are concerned about interest rates in the next three months and want to hedge with an interest rate derivative.

47.What do you fear?

a) IR will fall and the portfolio value will increase.
b) IR will fall and the portfolio value will decrease.
c) IR will rise and the portfolio value will increase.
d) IR will rise and the portfolio value will decrease.
e) None of the above


48. What is your strategy?  Why?

a) Long t-bond futures contracts because they will increase when the bond portfolio decreases in value.
b) Short t-bond futures contracts because they will increase when the bond portfolio decreases in value.
c) Long t-bond futures contracts because they will increase when the bond portfolio increases in value.
d) Short t-bond futures contracts because they will increase when the bond portfolio increases in value.
e) None of the above


49.  How many contracts do you want to long/short if the price of the hedge is $900,000 on a $1M face value, the duration of the portfolio is 7.0 years and the duration of the hedge is 10 years?
a) 139
b) 132
c) 78
d) 80

$100m*7     =    78
0.90m*10

50.  Long or short?

A.Long
B.Short

zitashadow

辛苦啦，谢谢马桶....

Mayson

我再次代表125350群全体成员谢谢马部长,马桶真的很辛苦.为了我们这次TUT花了很多时间,没有办成也是遗憾. 希望大家理解.也多多支持学习部.

5EFHE

謝謝樓上兩位的理解......

随风飘流

谢谢，辛苦了．．．．．．

☆四叶草☆

thx!!!!!!!!!

小东子

辛苦了~!  太谢谢了~! 三克油 VERY MUCH!!!!

Le

thanks a lot...............

小昕呀

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梅西首席Tutor——马桶
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小东子

终于找到你了~ 往上顶一下 ~~〉。。！！！