Lecture 6
Interest Rate Futures
Reading: Chapter 6
Hull J. 2013, Fundamentals of futures and options markets, 8th edn., Pearson
Education
1
Day Count Conventions in the U.S. (Page 133-134)
Treasury Bonds: Actual/Actual (in period)
Corporate Bonds: 30/36
SUGGESTED ANSWER
CHAPTER 1: Introduction to derivatives
1. Problem 1.8.
Suppose you own 5,000 shares that are worth $25 each. How can put options be used to
provide you with insurance against a decline in the value of your holding over the next four
month
Marks
Zeromarks
Halfmarks
FullMarks
Some parts were factually wrong.
Some parts unclear or not
well explained.
Clear and well explained.
Used 3 of the 4 aids and drew attention to
the links between them.
Content
2
Solution
1
Correctly used formulas, graph
Problem 14.1 JPMorgan: Petrobras' WACC
JPMogan produced the following WACC calculation for Petrobras versus Lukoil of Russia
in their 18 June 2004, report. Evaluate the methodology and assumptions used in the
calculation. Assume a 28 % tax rate for both c
Problem 10.1 Siam Cement
Siam Cement, the Bangkok-based cement manufacturer, suffered enormous losses with the coming of the
Asian crisis in 1997. The company had been pursuing a very aggressive growth strategy in the mid-1990s,
taking on massive quantiti
3.16/
s = 1.2
F = 1.4
=0.7
The producer wants to purchase 200,000 pounds of live cattle on
November:
- If the price rises, the producer will lose
- If the price falls, the producer will gain
To hedge its risk, the producer decides to buy futures contracts
Determination of Forward and
Futures Prices
Chapter 5
1
Consumption vs Investment Assets
Investment assets are assets held by
significant numbers of people purely for
investment purposes (Examples: gold, silver)
Consumption assets are assets held primar
Problem 1.8.
Suppose you own 5,000 shares that are worth $25 each. How can put options be used to
provide you with insurance against a decline in the value of your holding over the next four
months?
You should buy 50 put option contracts (each on 100 shar
Hedging Strategies Using Futures
Chapter 3
1
Long & Short Hedges
A long futures hedge is appropriate when
you know you will purchase an asset in the
future and want to lock in the price
A short futures hedge is appropriate when
you know you will sell an
Problem Set 1
Problem 1.8.
Suppose you own 5,000 shares that are worth $25 each. How can put options be used to
provide you with insurance against a decline in the value of your holding over the next four
months?
Problem 1.9.
A stock when it is first issu
Mechanics of Options Markets
Chapter 9
1
Types of Options
A call is an option to buy
A put is an option to sell
A European option can be exercised only at
the end of its life
An American option can be exercised at any
time
2
Option Positions
Long call
The Black-Scholes-Merton Model
303
Merton, R. C., "Theory of Rational Option Pricing," Bell Journal of Economics and Management
Sc~nce 1 4 (Spring.1973): 141-83.
On Risk-Neutral Valuation
Cox, J. C., and S. A. Ross, "The Valuation of Options for Alternati
216
CHAPTER 9
worth more than
max(Ke-rT- Sa, 0)
When dividends with present valueD will be paid, the lower bound for a European call
option becomes
max(Sa - D- Ke-rT, 0)
and the lower bound for a European put option becomes
max(Ke-'rT + D- Sa. 0)
Put-call
Sample paper- AUT15
Part A: Multiple choice questions:
Answer ALL questions:
(Please choose the best possible answer)
(15 x 1 = 15 marks)
1. On March 1 a commoditys spot price is $60 and its August futures price is $59. On July 1 the spot
price is $64 and
Mechanics of Futures Markets
41
Forward contracts differ from futures contracts in a number of ways. Forward
contracts are private arrangements between two parties, whereas futures contracts are
traded on exchanges. There is generally a single delivery da
174
CHAPTER 7
Cooper, 1., and A. Mello. "The Default Risk in Interest Rate Swaps," Journal of Finance, 46, 2
(1991): 597-620.
Dattatreya, R. E., and K. Hotta. Advanced Interest Rate and Currency Swaps: State-of-the-Art
Products, Strategies, and Risk Manag
16
CHAPTER 1
SUMMARY
One of the exciting developments in finance over the last 30 years has been the growth
of derivatives markets. In many situations, both h~dgers and speculators find it more
attractive to trade a derivative on an asset than to trade th
Properties of Stock Options
Chapter 10
1
Notation
c : European call option C : American Call option
price
p : European put option
price
S0 : Stock price today
K : Strike price
T : Life of option
: Volatility of stock
price
price
P : American Put option
p
Hedging Strategies Using Futures
67
FURTHER READING
Allayannis, G. and J. Weston. "The Use of Foreign Currency Derivatives and Firm Market
Value," Review of Financial Studies, 14, I (Spring 2001): 243-76.
Bodnar, G. M., G. S. Hayt, and R. C. Marston. "199
Binomial Trees
257
Questions and Problems cfw_Answers in Solutions Manual)
11.1. A stock price is currently $40. It is known that at the end of 1 month it will be either $42
or $38. The risk-free interest rate is 8% per annum with continuous compounding.
Sample paper- Autumn2015
Sample Paper Autumn Session 2015
School of Business
STUDENT DETAILS
Complete your details in this section when instructed by the Exam Supervisor at the start of the exam.
You should also complete your details on any answer booklet
LECTURE TWO
Mechanics of Futures and Forward
Markets
1
Comparison of futures and forward
markets
Both are in essence agreements to buy or sell
the underlying in the future.
An example from Hull makes this clear:
2
Comparison of futures and forward
marke
Interest Rates
Chapter 4
1
Types of Rates
Treasury rates
LIBOR rates
Repo rates
2
Treasury Rates
Rates on instruments issued by a government
in its own currency
3
LIBOR and LIBID
LIBOR is the rate of interest at which a bank is
prepared to deposit mo
Tutorial Program
Allocation of Tutorial Questions to students will be made in Week 2 ( 2-6 March )
Presentation Start from Week 3 (9-13 March )
Students are advised to participate in the discussion of questions following the
presentation.
WEEK
TOPIC
STUDE
"95
Interest Rates
size of a small parallel shift in the zero curve, and !l.B is the resultant effect on the value
of the bond portfolio.
Liquidity preference theory can be used to explain the interest rate term structures
that are observed in practice. T
122
CHAPTER 5
Table 5.5 Summary of results for a contract.with time to maturity Ton an investment
asset with price So when the risk-free interest rate for a T-year period is r.
Asset
Provides no income:
Provides known income
with present value /:
Provides
LECTURE ONE
Introduction to Derivatives
1
Lecture Outline
What are derivatives?
Background to derivatives markets.
The dangers of derivatives?
The size of the derivatives market.
Exchange Trading & OTC trading
2
Lecture Outline
Introduction to
Futures
144
. CHAPTER 6
to assess the sensitivity of a bond portfolio to small parallel shifts in the yield curve. It
also enables the hedger to assess the sensitivity of an interest rate futures price to small
changes in the yield curve. The number of futures co
Swaps
Chapter 7
1
Nature of Swaps
A swap is an agreement to exchange
cash flows at specified future times
according to certain specified rules
2
An Example of a Plain Vanilla Interest
Rate Swap
An agreement by Microsoft to receive 6month LIBOR & pay a fi