Directions: Type your answer to each question where indicated. Use more space if needed. At least six lines per question.

1. A bank observes the following term structure of LIBOR:

Term (days) Rate

90 5.00%

180 5.15%

270 5.25%

360 5.30%

a. Find the rate on a new 6 X 9 FRA.

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b. Suppose a $30 million FRA was established at 5.2 percent and expires in 180 days. The underlying is the 180-day LIBOR. Find the value of the FRA for the party paying fixed and receiving floating.

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2. Show how a combination of interest rate caps and floors can be equivalent to an interest rate swap.

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3. Determine the value of an interest rate call option at the maturity of a loan if the call has a strike of 12 percent, a face value of $50 million, the loan matures 90 days after the call is exercised, the call expires in 60 days, the call premium is $200,000, and LIBOR ends up at 13 percent.

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4. If the stock price is currently 36, the exercise price is 35 and the stock ends up at 44, what is the value of an asset-or-nothing option at expiration?

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5. What is the advantage of implementing portfolio insurance using stocks and puts over stock and futures in a dynamic hedge strategy?

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