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Part 1
21
22
23
24
/50
/12.5
/12.5
/12.5
/12.5
Total
Time Allowed:
Aids Allowed:
To be supplied by Candidate:
Attached to this paper:
Format:
Calculator
Formula Sheet
Part B Answer these questions on the question paper in the space provided.
21.
Complete the table (below) of continuously compounded zero (spot) rates if the cash price of
a bond that matures in exactly 18 months is $1,033.02. The bond has a face value of $1,000
and pays coupons semi-annually with a coupon rate of 8% p.a..
Maturity (months)
6
12
18
24
Rate (% p.a.)
5.30
5.50
?
5.65
[12.5 marks]
22.
Suppose that it is February 23rd and the treasurer of an US firm realises that on August 23rd
the firm will have to issue $3 million of commercial paper with a maturity of 180 days. If
the paper were issued today, the firm would realise $2,892,000. September 91-day T-bill
futures ($1million) are quoted at 92.00 on the CME. Describe the steps the treasurer should
take to hedge the firms exposure?
[12.5 marks]
N=
S DS
F DF
2892000 0.5
980000 0.25
= 5.902
February:
Sell 6 September 90-day bank bill futures contracts
August:
Buy 6 September 90-day bank bill futures contracts to close futures position, and issue (sell)
commercial paper with $3 million face value.
23.
On December 21st 2012, Eve entered into a one-year long forward contract to buy 100
ounces of gold for USD1,700.00/oz. Three months later (March 21st, 2013), she observes
that the spot price of gold was USD1,620.00/oz, what is the value of her position on this
date? Assume the only carrying cost associated with gold is the interest rate, which remains
unchanged at 10% p.a. (continuous compounded) for all maturities.
[12.5 marks]
f = ( F0 K )e rT
F0 = S 0 e rT
and
hence
f = S 0 K .e rT
= 1620 1700.e 0.10.75
= +$42.84
Since Eve had a long position, she has made a gain (agreed to buy at a price below the new
equilibrium futures price).
(Loss)
24.
The continuously compounded dividend yield on the SPI is 3.0% p.a. and the risk-free rate
of interest is 1.3% p.a. with continuous compounding for all maturities. If the five-month
S&P500 share price index (SPI) futures price is 1,600 points, what will be the noarbitrage value of the two-month index futures contract?
[12.5 marks]
F =Fe
2 1
(r q)(T2 T1 )
( 0.013 0.030)).( 5 2 )
12 12
1600 = F .e
1
1600 = F .e 0.0170.25
1
F = 1607
1
______________________________________________
END OF PAPER
10
F0 = S 0 e ( r q )T
F0 = S 0 e ( c y )T
F2 = F1e
( r q )(T2 T1 )
f = ( K F0 )e rT
F0 = S 0 e ( rh rf ) T
RC = m ln(1 +
Rm
)
m
Rt ,t + n =
Rt + n .Tt + n Rt .Tt
Tt + n Tt
h=
N=
n
Discount Rate
360
S
=
F
VS DS
V F DF
N =
VS
VF
ci e yti
D = ti
B
i =1
n
B
= Dy
B
________________________________
11