BANK 1005(11941) Derivatives and Securities Markets
Page 1 of 8
Review 6 (Topic 6 – Derivatives Markets)
Questions and Problems
You should answer the following
Questions and Problems
Chapter 14:
2, 3, 5, 7
Chapter 15:
1, 2, 3, 5
Suggested solutions/guide to these
Questions and Problems
are provided in
this
Review 6
and are sourced from the reference indicated at the end of these
notes.
Consider this feedback as a guide toward writing a sound explanation, not
as the “best
answers”. Take the feedback as a starting point for building your own explanations or
discussions. To craft a ‘good answer’, you need to employ your learning and thinking,
use good writing skills and include high quality discussions and arguments. Learning
about the financial markets involves a “package” of resources, rather than just
learning these “answers”. You need to show real understanding acquired from your
learning and thinking in your explanations to such questions and issues. Often,
according to the authors of your book (in the preface), the problems and questions
have been chosen to “provoke debate rather than a search for the ‘correct answer’.”
Take these questions and the suggested feedback in this spirit!
CHAPTER 14
1.
Assume the gold price is US$400 per ounce, the threemonth interest rate is
6.5% p.a. and the gold lending rate is 1.5% p.a.
What is the threemonth
forward gold price?
The forward price of gold (F) is:
()
98
.
404
00375
.
1
01625
.
1
400
4
015
.
0
1
4
065
.
0
1
400
F
=
=
+
⎟
⎠
⎞
⎜
⎝
⎛
+
=
The forward price is US$404.98.
This preview has intentionally blurred sections. Sign up to view the full version.
View Full DocumentBANK 1005(11941) Derivatives and Securities Markets
Page 2 of 8
Review 6 (Topic 6 – Derivatives Markets)
2.
Assume that there is available a 180day bank bill futures contract with a
face value of $500,000.
The contract settling in six months is currently
trading at a price of 96.00.
Show that its PVBP is $23.71.
A $100 million inflow is expected in six months’ time and it will be invested
in the 180day bill market.
How can we hedge this investment?
What are
the problems?
How can we use this contract to create a synthetic 360day bill?
The yield on the futures contract is:
100 – 96.00 = 4.00
In order to calculate the PVBP at 4.00% p.a., we need to calculate the price of a
bill with face value $500,000 at 4.00% and 4.01% p.a.
4.00
P
=
$490327.78
4.01
P
=
$490304.07
PVBP =
$23.71
The PVBP for the exposure is:
51
.
4931
$
365
180
0001
.
0
m
100
$
=
×
×
We buy contracts.
The number is:
contracts
208
71
.
23
51
.
4931
=
The problems are:
we miss out on the benefit of any interest rate increase;
we may need to meet margin calls; and
there is a minor rounding problem in that the number of contracts is
rounded to the nearest whole number.
This is likely to be minor
compared with the exposure of $100m.
The equivalent of a 360day bill can be created by:
This is the end of the preview.
Sign up
to
access the rest of the document.
 Three '09
 HB
 Derivatives, Derivative, securities markets, Derivatives Markets, Derivatives and Securities Markets

Click to edit the document details