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Unformatted text preview: Assignment 2 Answers Johnson Graduate School of Management Equity Derivatives & Related Products Due on September 21, 2010 Professor Mark Zurack Question 1 You are a hedge fund and are very bearish on AAPL. You are presented with the following alternatives to create a bearish position on AAPL: a) Sell 100,000 shares short for $260. The rebate you would receive on AAPL equals 0.2% per year. AAPL pays no dividend. You expect to hold the position for three months. b) Enter into an Equity Swap contract with the following terms: Hedge Fund Pays Total return on AAPL over the next three months on 100,000 shares of exposure. The starting point to measure return equals $260 Hedge Fund Receives - $25,000 in cash Which transaction would you prefer and why? Answer: Both transactions create profits if AAPL falls, and losses if AAPL rises. The difference is that the cash payment of $25,000 received by the Hedge Fund exceeds the Rebate of $13,000 from the Short Sale.cash payment of $25,000 received by the Hedge Fund exceeds the Rebate of $13,000 from the Short Sale....
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