Companies A and B have been offered the following rates per annum on a $20 million fiveyear loan:
Company A requires a floating-ra
Hedging Strategies Using Futures
Under what circumstances are (a) a short hedge and (b) a long hedge appropriate?
A short hedge is appropriate when a company owns an asset and expects to sell that asset in the
Determination of Forward and Futures Prices
Explain what happens when an investor shorts a certain share.
The investors broker borrows the shares from another clients account and sells them in the
usual way. To cl
Properties of Stock Options
List the six factors affecting stock option prices.
The six factors affecting stock option prices are the stock price, strike price, risk-free interest
rate, volatility, time to matur
Mechanics of Options Markets
An investor buys a European put on a share for $3. The stock price is $42 and the strike price
is $40. Under what circumstances does the investor make a profit? Under what
Interest Rate Futures
A U.S. Treasury bond pays a 7% coupon on January 7 and July 7. How much interest
accrues per $100 of principal to the bond holder between July 7, 2011 and August 9, 2011?
How would your answe
A bank quotes you an interest rate of 14% per annum with quarterly compounding. What is
the equivalent rate with (a) continuous compounding and (b) annual compounding?
(a) The rate with continuous c
Mechanics of Futures Markets
Distinguish between the terms open interest and trading volume.
The open interest of a futures contract at a particular time is the total number of long positions
Chapter 1 Problems
Describe the profit from the following portfolio: a long forward contract on an asset and a
long European put option on the asset with the same maturity as the forward contract and a
strike price that is equal to the forwa