SuppQuestions_parta(2009)

SuppQuestions_parta(2009) - FINM3405 Derivatives & Risk...

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FINM3405 Derivatives & Risk Management Supplementary Questions Question 1 Today is 1 May and the spot exchange rate AUD 1.00 = NZD 1.22. That is, one AUD buys you NZD 1.22. You have no underlying position/commitments in NZD but will merely speculate on exchange rate movements. The six-month forward rate for AUD 1.00 = NZD 1.18. a) If I talk about the NZD ‘strengthening’ relative to the AUD, what does this mean? That is, give me an example of an exchange rate quote after the NZD has strengthened. b) If you want to speculate on the NZD strengthening relative to the AUD, will you take a long or short forward position in NZD? Given your answer to b), enter a forward contract on (say) NZD 100,000 at the six-month forward rate quoted above. c) On maturity of this forward contract in six-month's time, the spot exchange rate is 1.3000 (i.e. AUD 1.00 buys NZD 1.30). You close out the forward position with a new transaction equal in magnitude and opposite in sign to your original transaction in part b). Have you made a gain or loss on the forward position? d) Ignore c). On maturity of this forward contract in six-month's time, the spot exchange rate is 1.05 (i.e. AUD 1.00 buys NZD 1.05). You close out the forward position with a new transaction equal in magnitude and opposite in sign to your original transaction in part b). Have you made a gain or loss on the forward position? Question 2 Lecture 3 began with an example of why a forward contract for delivery of WBC in one year must be priced at $23.13; specifically, if it trades at any other price, an arbitrage opportunity is available. That example was simplistic in that I assumed WBC paid no dividends during the next year. Reconsider the information from Tute 3 Q2e . It involved a forward contract to deliver TST shares in nine month’s time. TST is currently trading at $10 and is expected to pay a dividend of $0.90 in exactly five month’s time. The riskfree rate of interest is 6% pa. Tute 3 calculated the no-arbitrage price of this forward contract at $9.54. a) Assume you have found someone willing to enter into a nine-month forward contract on TST at a delivery price of $9.80. Explain what trades you would execute to capture the arbitrage opportunity. b) Assume you have found someone willing to enter into a nine-month forward contract on TST at a delivery price of $9. Explain what trades you would execute to capture the arbitrage opportunity. Question 3 Assume, for whatever reasons, you require 1,000 barrels of crude oil on 31 March 2007. Today is 24 November 2006. The spot price of oil is $22 per barrel. The forward price for oil with 31 March delivery is $25. You decide to enter a long forward contract covering 1,000 barrels (we will shortly see that this strategy is an effective hedge against unfavourable movements in oil price). Calculate how much you will pay for the oil if: © Philip Gray 2009 Not to be re produced without permission 1
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a) on 31 March, the spot price of oil is $30 per barrel and you physcially take delivery of the oil. b)
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This note was uploaded on 08/27/2009 for the course FINM 3405 taught by Professor Philipgray during the Three '09 term at Queensland.

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SuppQuestions_parta(2009) - FINM3405 Derivatives & Risk...

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