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Risk Management Solutions 2

# Risk Management Solutions 2 - D Bob pays the clearing house...

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Old Exam Questions - Risk Management - Solutions Page 2 of 4 Pages Gain on Transaction \$ 625 90-Day Cash T-Bills Value at Purchase (2.90%) \$992,750 Less Gain on Futures - 625 Effective Price \$992,125 Effective Discount = \$1,000,000 - \$992,125 = 7,875 Effective Yield = (\$7,875)(360/90) / (\$1,000,000) = 3.15% Since the spread changed to +15 basis points, your effective yield will be: 3.30% - (+.15%) = 3.15% 5. On November 13, Al buys a July futures contract on 100 tons of soybean meal at a price of \$172.0 a ton. On the same day, Bob sells this futures contract at the same price. On November 14, the July contract is trading at \$174.2 a ton. Given that the contract is marked to market, what payments need to be made on the 14 th ? (Ignore transaction costs.) A. Al pays the clearing house \$220 and the clearing house pays Bob \$220 * B. Bob pays the clearing house \$220 and the clearing house pays Al \$220 C. Al pays the clearing house \$172 and the clearing house pays Bob \$174.2
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Unformatted text preview: D. Bob pays the clearing house \$174.2 and the clearing house pays Al \$172 E. None, no payments are made until July The one day change is (\$174.2 - \$172.00)(100) = \$220. Since Al buys the contract, he gains on increases in the contract prices (he can buy wheat at his contract price of \$172 and sell it in the market at \$174.2), whereas Bob, who sold the contract, loses on increases in the contract prices. Therefore, Bob will pay the clearing house and Al will be paid by the clearing house. 6. Assume that the current level of Standard & Poor's index is 250. The prospective dividend yield is 3.2%, and the interest rate is 7%. What is the value of a one-year future on the index? (Assume all dividend payments occur at the end of the year.) A. 230.7 B. 250.0 * C. 259.5 D. 267.5 E. None of the above Total return required = (250)(0.07) = 17.50 Return from dividend yield = (250)(0.032) = 8.0 Return from capital appreciation = 17.5 - 8.0 = 9.50...
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