Project #14127 - Finc stuff

Due: Tuesday October 8, 2013

 

Finance 445:  Assignment #1

 

Question One:

        (a)

What factors would determine whether a particular strategy is a hedge or a speculative strategy?

 

        (b)

Explain the differences among the three means of terminating  a futures contract: an offsetting trade, cash settlement and delivery.  How is a forward contract terminated?

 

 

Question Two:

        (a)

What factors distinguish a forward contract from a futures contract?  What do they have in common?  What advantages does each have over the other?

 

        (b)

Explain how the clearinghouse operates to protect the futures market.

 

 

Question Three:

        (a)

Why is the value of a futures or forward contract at the time it is purchased equal to zero?  Contrast this with the value of the corresponding spot commodity. 

 

        (b)

The following information was available:

 

        Spot rate for Japanese Yen:  $0.009313

        730-day forward rate for Japanese Yen:  $0.010475 (assume a 365-day year)

        risk free rate (US):   7%            risk free rate (Japan):  1%

 

Assuming annual compounding, determine whether interest rate parity holds and, if not, suggest a strategy to take advantage of the situation.

 

 

Question Four:

Assume that there is a forward market for a commodity.  The forward price of the commodity is $45.  The contract expires in 1-year. The risk free rate is 10%.  Now, 6-months later, the spot price is $52.  What is the forward contract worth at this time?   Explain why this is the correct value of the forward contract in 6-months even though the contract does not have a liquid market like a futures contract.

 

If you did not observe the spot price, but could only look to the forward market, how would your analysis above be changed?  Using the methodology you describe, what would be the value of the forward contract in 6-months?

 

Question Five:

A financial manager needs to hedge against a possible decrease in short term interest rates.  She decided to hedge her risk exposure by going short on a FRA that expires in 90-days and is based on 90-day LIBOR.  The current term structure for LIBOR is:

                30-day                    5.83%

                90-day                    6%

                180-day          6.14%

                360-day          6.51%

 

(1)  What type of FRA is being used by the financial manager?

(2)  Determine the FRA rate.

(3)  It is now 30-days since the portfolio manager took a short position in the FRA.   

       Interest rates have changed over the interim.  The new term structure for LIBOR

       is:

                60-day                    5.5%

150-day          5.62%

 

      What is the value of the FRA now?

(4) What would be the payoff associated with the FRA if at the expiration date the

       current 90-day LIBOR is 5.85%?

 

 

 

 

 

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Due By (Pacific Time) 10/08/2013 02:00 pm
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