Review 6 - BANK 1005(11941) Derivatives and Securities...

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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 three-month interest rate is 6.5% p.a. and the gold lending rate is 1.5% p.a. What is the three-month 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.
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BANK 1005(11941) Derivatives and Securities Markets Page 2 of 8 Review 6 (Topic 6 – Derivatives Markets) 2. Assume that there is available a 180-day 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 180-day bill market. How can we hedge this investment? What are the problems? How can we use this contract to create a synthetic 360-day 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 360-day bill can be created by:
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This note was uploaded on 10/19/2011 for the course BANK 1005 taught by Professor Hb during the Three '09 term at South Australia.

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Review 6 - BANK 1005(11941) Derivatives and Securities...

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