Charles-Antoine Plamondon 1440089
Cole Faminoff 1366088
JV Partners Inc.
Finance 413 Case Assignment 1
Felipe Aguerrevere
Section A1
University of Alberta
October 28th, 2015
After analysis of the JV Partners (JVP) case, we had to figure out what LIBOR rat

The Greek Letters
Chapter 17
1
Principal Protected Note
Investor buys a note from a life insurance
company that matures in 15 years for $1000
At maturity the investor gets the following
payoff.
The maximum of:
2
The payoff from a 15 year investment of $10

The market makers problem
Addendum to ch. 5
1
Market makers provide liquidity
Market makers (MMs) stands ready to
transact in a specified set of products
Main job is to make money on bid-offer
spread (i.e. buy and sell products all day long
and keep a l

FIN 413: Option mechanics and
properties
Relates to Hull Ch. 9 and 10
Text Ch. 9 provides some institutional detail that we will not cover in class
Terminology: Moneyness
At-the-money
option
(S=K)
In-the-money
option
For call, S>K
For put, S<K
Out-o

FIN 413: Index, Currency, and
Futures Options
Relates to Hull Chs. 15 and 16
Extending BSM to yielding assets:
Consider assets that pay a yield of q, a yield expressed
as a continuously compounded rate per annum.
Payment of a dividend yield at rate q caus

FIN 413: Binomial Trees
Relates to Hull Ch. 12
This simple model is very important
Provides the essence of how derivatives are
priced in practice
In the limit, it leads to the same result we get
from more complex methodologies (i.e. we get
Black-Scholes f

Futures and Forward Prices
In the discussion and formulas that follow, the following
notation is used
T:
remaining time until the delivery in units of years
r:
continuously-compounded riskless rate for maturity T
S0:
spot price of the underlying asset

University of Alberta School of Business
Department of Finance and Statistical Analysis
FIN413 Risk Management
Winter 2017
Assignment 3
Due: March 23
1. As a swap broker, you are in touch with two firms, A and B. In the fixed-rate loan market A can
borrow

University of Alberta School of Business
Department of Finance and Statistical Analysis
FIN413 Risk Management
Winter 2017
Assignment 2
Due: March 2
1. It is Dec 31st 2016 and you observe that the four-year forward price of a stock that trades for 50TL in

University of Alberta School of Business
Department of Finance and Statistical Analysis
FIN413 Risk Management
Winter 2017
Assignment 1
Due: Feb 2
1. Your firm has just signed a deal to sell 2,200,000 board feet of random length lumber to a U.S.
based fur

FIN 413: Introduction to Derivatives
Relates to Hull Ch. 1
1
Definition of derivative security
An instrument whose value depends on the
values of other more basic underlying
variables
2
How might we use these securities?
Hedging
Speculating (or, more mild

FIN 413: Swaps
Relates to Hull Ch. 7
What is a swap?
An agreement between two parties to
exchange cash flows that are based on
difference reference variables in the future,
but have the same present value.
All swaps are about exchanging things with
the sa

FIN 413: Forward and Futures Prices
Relates to Hull Ch. 5
Investment vs consumption assets
Investment asset: An asset that is typically
not exclusively used for investment
purposes
Consumption asset: An asset typically not
exclusively used for consumptio

FIN 413: Interest Rate Futures
Relates to Hull Ch. 6
US 10-yr Treasury note yield to maturity
Daily data, first half 2013
US10YrTreasuryYield,Yearto30Jun13
%
2.5
2.0
1.5
Jan
Feb
Mar
Apr
Date
2
May
Jun
Interest rate risk
Interest-paying investments (and po

FIN 413: Interest rates and
Forward Rate Agreements
Relates to Hull Ch. 4
Compounding conventions matter
Stated
Annual Rate
# of
compounding
periods per
year
Value of $1
after a year
Commonly
referred to
as
10%
1
$1.10
Effective Annual
Rate (EAR)
9.762%
2

FIN 413: Hedging with Futures
Relates to Hull Ch. 3
The big idea of hedging with futures
Use futures to neutralize a price risk due
to an exposure in the cash or physical
market
2
A party has an exposure to a risk factor due to
some aspect of its business

FIN 413: Futures Mechanics
Relates to Hull Ch. 2
Futures Contracts
Available on a wide range of underlyings (see,
for example, http:/www.cmegroup.com/ or
http:/www.m-x.ca.
Exchange traded
Specifications need to be defined:
What can be delivered,
Where it

Some hedging scenarios
(Ch. 3)
Equitizing cash
A US equity portfolio manager has a $100MM
portfolio that is 4% cash. She is holding an
unusually high cash balance as her client is
withdrawing $4MM in one week.
She is concerned that the market may rally
be

Topic 1: The Use of Securities: Hedging (mitigate risk of interest exposure), Speculating, Arbitrage (making riskless profit
between the cash value of $ and its value on the futures marketMUST BE RISK FREE AND PROVIDE NO NET INVESTMENT).
Types of derivati

Working with interest rates:
Part 2
Continuous compounding and
discount factors
G. R. Smith
Continuous compounding
Our EAR APR relationship
R
(1 EAR) 1 m
m
m
When m (i.e. there is very high
compounding frequency), this becomes:
(1 EAR) eRm
To avoid con

FIN 413: Forward and Futures Prices
Relates to Hull Ch. 5
Investment vs consumption assets
Investment asset: An asset that is typically
not exclusively used for investment
purposes
Consumption asset: An asset typically not
exclusively used for consumptio

FRAs: An example of basic
mechanics and valuation
G. R. Smith
An example of an FRA
It is 31 Dec 2012.
You will be receiving $10MM on 30 June 2013.
You will need to park the money for 3 months
upon receipt.
You are fearful that interest rates will fall

Problem 4.8
The cash prices of six-month and one-year
Treasury bills are 94.0 and 89.0. A 1.5-year
bond that will pay coupons of $4 every six
months currently sells for $94.84.
. Calculate the six-month, one-year, and 1.5-year
zero rates (continuously com

Swaps
Topic 6
Swaps
A swap is an agreement between two parties to
exchange cash flows that are based on different
reference variables in the future, but have the
same present value.
All swaps are about exchanging things with the
same PV.
Many types. Mo

Topic 1:
The foreign exchange market
What will we cover?
Nature of the market
Spot, forward, real, effective exchange rates
Cross rates
Triangular and covered interest arbitrage
Arbitrage and least cost dealing bounds on
cross and forward quotes
Bid and

Topic 5:
Exchange rate hedging
What will we study?
Why hedge?
How to hedge
Translation exposure
Transaction exposure
Operating exposure
Usually involves derivatives, sometimes financial or
real strategies
Problems and institutional details in using
der

Topic 3:
Exchange Rate Determination
and Forecasting
1
What will we cover?
[Quick tour] Balance of Payments preliminaries
BOP and floating exchange rates
Models of exchange rate determination
Apply to floating exchange rates, as do the next two
issues

Mechanics of Options Markets
Topic 7
Option: Derivative
Derivative
Underlying
2
History
One of the earliest derivatives
markets: the market for tulip
options in the 17th century in
Holland.
3
Options
An option is a contract between two parties:
The
buyer

Hedging Strategies Using Futures
Topic 3
The Big Idea of Hedging
Use futures to neutralize a price risk due to an
exposure in the market.
A party has an exposure to a risk factor due to some aspect
of its business that it wishes to neutralize.
The part

Mechanics of Futures Markets
Topic 2
Spot versus Futures Transaction
Spot transaction:
Item is exchanged
Now
Agreement is reached
Futures transaction:
Item is exchanged
Now
T
Agreement is reached
2
Futures Trading
Buyer
Long
Takes delivery.
Futures
contra

Introduction to Risk
Management and Derivatives
Topic 1
Risk Management
Allows firms to:
Separate out the financial risks that they face.
Remove or neutralize the risk exposures they do not want.
Retain or possibly increase the risk exposures they wan