3 - THE UNIVERSITY OF HONG KONG FACULTY OF BUSINESS AND...

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1 THE UNIVERSITY OF HONG KONG FACULTY OF BUSINESS AND ECONOMICS FINA0301CDE - DERIVATIVES First Semester, 2009-2010 Tutorial 3 Problem Set – Chapter 3 & 4 c Chapter 3 Question 1* (Tutorial 2 Question 5: Zero-cost collar) Suppose you invest in the S&R index for $1000, buy a 950-strike put, and sell a 1107-strike call. (a) Draw a profit diagram for this position. (b) How close is this to a zero-cost collar? c Chapter 4 Question 2 (Futures) In the Chicago Board of Trade’s corns futures contract, the following delivery are available: March, May, July, September and December. State the contract that should be used for hedging when the expiration of the hedge is in (a) June, (b) July, and (c) January. Question 3 (Basic Risk Management) Imagine you are the treasurer of Japanese Company exporting electronic equipment to the United States. Discuss how you would design a foreign exchange hedging strategy and the arguments you would use to sell the strategy to your fellow executives. For Question 4-8 , assumed the following: Consider the following three firms: s XYZ mines copper, with fixed costs of $0.5/lb and variable cost of $0.40/ib.
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3 - THE UNIVERSITY OF HONG KONG FACULTY OF BUSINESS AND...

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