FM212 MT2014 Problem Set Solutions
Class 1
1.
The construction of the motel is a good investment if the NPV is positive, which means
that the present value of the benefits is greater than the initial investment:
NPV = $1,300,000 + ($1,500,000/1.10) = +$63

FM212 Principles of Finance Problem Sets MT2015
Class 9
25. The following table lists prices of options on IBM stock.
Stock
IBM
Time to Exercise
(months)
1
Exercise
Price
120
Stock
Price
126
Put Price
2
Call
Price
8
a. Using the information above derive t

Duration: worked example
Consider a bond with annual coupon payments and 5 years to maturity. It has the features below;
Face value
Coupon rate
Yield
100
5.00%
7.00%
Pricing
Duration computation
Year Cashflow
1
5
2
5
3
5
4
5
5
105
DCF
4.673
4.367
4.081
3.

FM212 Class and Reading Schedule
Class exercises due in a particular week typically depend on the previous weeks
lecture and reading assignment, detailed below. Class exercises typically consist of at
least four questions. Students should bring written an

Example Contract struck in June to deliver at a price of 100
Delivery 3 months later, in September
Monthly margin payments
June
July
August
September
Margin cashflows
Margin balances
Short
Long
Short
Long
Sep Futures price Farmer Producer Farmer Producer

Spot and forward rate: examples
Year
1
2
3
4
5
Notes:
Spot rate
0.0500
0.0550
0.0600
0.0650
0.0600
First: derive forward rates
from spot rates
Then: show that spot rates can be derive
from cumulative products of forward rat
Forward rate
0.0500
0.0600
0.07

30 day currency forward pricing
Notation
F
P
r
r_yen
Assume
An investor who has P units of Sterling
Investment strategy 1
Invest P in the UK bank account for 30 days
Investment strategy 2
No-arbitrage
Sterling price of 1 Yen in the 30-day forward market
S

FM212: a short note on duration
Richard Payne
We looked at duration and modified duration (or volatility as it is sometimes called)
in lecture 4. Just looking at the computation you perform to measure the duration
of a bond, it is clearly a weighted avera

FM212 Principles of Finance Problem Sets MT2015
Class 4
10. You have estimated spot rates as follows:
Year
1
2
3
4
5
Spot Rate
0.25%
0.50%
0.75%
1.00%
1.25%
a. What are the forward rates for each period?
b. Calculate the PVs of the following government bo

30 day currency forward pricing
Notation
F
P
r
r_yen
Assume
An investor who has P units of Sterling
Investment strategy 1
Invest P in the UK bank account for 30 days
Investment strategy 2
No-arbitrage
Sterling price of 1 Yen in the 30-day forward market
S

FM212 Principles of Finance Problem Sets MT2015
Class 8
22. Yesterday you sold six-month futures on the German DAX stock market index at a price of
6,260. Today the DAX closed at 6,250 and DAX futures closed at 6,268. You get a call
from your broker, who

FM212 Principles of Finance Problem Sets MT2015
Class 10
28. CH 4 trading stock price is $100 and in each 3 month period will either increase by 25 percent
or fall by 20 percent. A 6-month call on CH 4 stock has an exercise price of $90. The risk-free
3-m