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.

Type your answer here

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.

Type your answer here

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

Type your answer here

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.

Type your answer here

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?

Type your answer here

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

Type your answer here

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.

Type your answer here

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.

Type your answer here

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

Type your answer here

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.

Type your answer here

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?

Type your answer here

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

Type your answer here

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