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ADMS4503 – Derivative Securities Fall 2009 Midterm Examination 1 YORK UNIVERSITY Faculty of Liberal Arts and Professional Studies School of Administrative Studies AP/ADMS 4503.03 DERIVATIVE SECURITIES MIDTERM EXAMINATION Solution Sunday, October 25, 2009 Prof. Nabil Tahani INSTRUCTIONS 1. Allowed material: Textbook, lectures notes and a calculator. 2. This examination contains 4 questions on 4 pages (including this cover page) and carries a total mark of 40 points . 3. Answer all questions in the examination booklet provided. 4. If you have to make any assumptions, state them clearly. Unrealistic assumptions, or those inconsistent with the information provided in the question, will not be accepted. 5. All interest rates are per annum and continuously compounded. 6. Show your work, including all formulas.

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ADMS4503 – Derivative Securities Fall 2009 Midterm Examination 2 Question 1 (10 marks) A commodity trading firm was following the trading activity in the copper market and has collected the following data: Copper Futures 3-month: \$2.8455 per pound 6-month: \$2.8610 per pound Canadian T-bill yields 3-month: 3% 6-month: 4% 1-year: 5.5% The continuously compounded annualized storage rate is 1%. (a) What are the implied Copper spot price and convenience yield? (4 marks) (b) What is the 1-year futures price? (2 marks) (c) Suppose that the 1-year market futures price is \$2.9145. What arbitrage would you undertake for 25,000 pounds? Show all details. (4 marks) Solution (a) The 3-month and 6-month futures prices are given by: ( ) () 5 . 0 ) % 1 % 4 ( exp 25 . 0 ) % 1 % 3 ( exp 0 6 0 3 × + = × + = y S F y S F m m We first solve for y: ( ) () () % 8270 . 3 / ln % 5 . 1 4 25 . 0 % 5 . 1 exp / 3 6 3 6 = × = × = m m m m F F y y F F and then for S 0 : ( ) 8443 . 2 \$ 5 . 0 % 5 . 2 exp 6 0 = × + = y F S m (b) The 1-year futures price is given by: ( ) 9213 . 2 \$ % 9135 . 1 % 1 % 5 . 5 exp 8443 . 2 \$ 1 = + × = y F
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