BEA602 Derivatives
First and Solely Paper
Strange Examination
Examiner: Dr Richard Mawulawoe Ahadzie
Time Allowed: TWELVE (12) hours
Directions:
Place and quantity ALL your solutions within the Microsoft Phrase file supplied, convert your phrase file into PDF and submit through MyLO when accomplished. Reply ALL (eight) Questions. Make sure you learn all directions and questions fastidiously earlier than answering. Please cite or write all formulation used, when and the place potential. Present all intermediate steps the place calculations are concerned. That is an open e book examination; it’s essential to not Help or search help from anyone else. You aren’t allowed to take the examination as a bunch or talk about the questions with anybody. You aren’t allowed to ship screenshots of the examination questions throughout or after the exams to anybody. This can be a take house examination.
The usage of an ordinary or monetary calculator is allowed for this examination.
Whole marks for this paper: 80. This examination accounts for 40 % of the general Assessment of this unit.
Declaration:
I declare that I recognise that this BEA602 examination is a take-home examination. I perceive the College of Tasmania’s coverage on Educational Integrity and conform to the phrases. I additionally declare that I’ve not breached Educational Integrity on this examination.
Breaches of educational integrity comparable to plagiarism, contract dishonest, collusion and so forth are counter to the basic values of the College. A breach is outlined as being when a scholar:
a) fails to satisfy the expectations of educational integrity; or
b) seeks to realize, for themselves or for every other particular person, any tutorial benefit or development to which they or that different particular person shouldn’t be entitled; or
c) improperly disadvantages every other member of the College neighborhood.
College students partaking in any breach of Educational Integrity could also be handled beneath the Pupil Educational Integrity Ordinance, and this may embody the imposition of penalties that vary from a deduction/cancellation of marks to exclusion from a unit or the College. Particulars of penalties that may be imposed can be found in that Ordinance.
Submitting this examination via MyLO will probably be taken as certification that you simply conform to the phrases of Educational Integrity outlined above.
Signed Pupil: _______________________________
ID Quantity: _______________________________
Question Assignment 1
Mark Gram a 3rd yr College of Tasmania scholar attended a derivatives masterclass this semester. From the category, Mark believes that derivatives all the time trigger important losses to merchants who commerce them. Is his consider True or False?
True
False
Can’t be decided with the data given
[2 marks]
Does excessive volatility in a market result in extra use of monetary derivatives? Clarify your reply.
[3 marks]
Mike Brooks is an artwork collector in central Hobart, at the moment costs of native veterans’ sculptures have skyrocketed. Right this moment, Mike buys a sculpture of the primary feminine lieutenant colonel for $795,500. Final 2-year, he purchased the sculpture of the primary Basic for $305,000, which is at the moment price $1,250,000 within the spot market. Mike believes that costs will proceed to extend and as such has determined to carry the belongings and promote later in 5-year time.
Is Mike hedging or speculating? Clarify
[2 marks]
Briefly clarify how Mike can use derivatives to hedge his publicity, spotlight the direct and oblique value to his technique.
[3 marks]
[Question 1 =10 marks]
Question Assignment 2
To hedge a number of the enter value danger, a producer can go lengthy place on the futures contract. Is that this assertion True or False?
True
False
Can’t be decided with the data given
[2 marks]
Clarify the impact of unstable rates of interest on ahead and futures costs, preserving all else fixed.
[3 marks]
Suppose an orange farmer and a juicy producer decides to enter a ahead contract, the juicy producer goes lengthy to purchase some oranges at a hard and fast value on the finish of the yr. The farmer goes brief to promote some oranges on the finish of the yr. They comply with commerce 1000 ounce of oranges on the ahead value of $330 per ounce on the supply date.
On the supply date, if the spot value is $300 per ounce, calculate the revenue and loss to each the farmer and producer.
[1.5 marks]
Suppose the producer decides to purchase a name possibility as an alternative of the ahead contract, the strike value is $270 per ounce, and the premium is $10. What can be the producer revenue?
[1.5 marks]
Out of your resolution in Question Assignment ‘i and ii’, which of the buying and selling methods is extra useful to the producer? Clarify your reply
[2 marks]
[Question 2 = 10 marks]
Question Assignment three
Suppose you’ve an insider data sure inventory value goes to extend for positive with a chance of 65%, assuming it’s authorized to commerce on this data the most effective buying and selling methods can be to purchase the inventory on margins or shopping for a name whereas concurrently holding the put. Is that this assertion True or False?
True
False
Can’t be decided with the data given
[2 marks]
Provided that ahead contracts have excessive default danger, listing three important causes any rational dealer may choose to commerce a ahead contract relatively than an equivalent future contract of identical maturity.
[3 marks]
Suppose the present inventory value is $35, time to maturity is zero.5 years, risk-free price is 5% per yr, the European name possibility costs with strike costs K1 = 30 is $2.75 and K2 = 35 is $1.50.
Draw a bearish vertical unfold by shopping for the decision possibility strike costs K2 and promoting the decision possibility with strike value K1. Spotlight the breakeven factors, most revenue and loss for this payoff diagram.
[3 marks]
Is the above buying and selling technique worthwhile to an investor who’s optimistic in regards to the underlying inventory? Clarify.
[2 marks]
[Question 3 = 10 marks]
Question Assignment four
Suppose you maintain zero.89 shares of a inventory, and also you need to hedge your draw back danger, this might be achieved by promoting a sure portion of cash market account models and utilizing the funds to purchases zero.89 further shares. Is that this assertion True or False?
True
False
Can’t be decided with the data given
[2 marks]
Briefly talk about the principle benefit of exchange-traded contracts to over-the-counter (OTC) contracts.
[3 marks]
Suppose the present inventory value is $65, volatility is 30%, risk-free price is three% each year repeatedly compounded for all maturities, the strike value is $50.
Utilizing the Cox-Ross-Rubinstein method, decide the worth of a by-product whose payoff is given as 2*max[(S_T-K),0] for a three-month time step with an American-style possibility that expires in six-months utilizing a two-step binomial tree. The place S_T is the inventory value. Present all terminate steps.
[4 marks]
Ought to the American possibility in c(i) be exercised early? Clarify your reply.
[1 mark]
[Question 4 = 10 marks]
Question Assignment 5
A derivatives scholar believes that the risk-neutral valuation method works nicely as a result of it assumes all traders are risk-neutral and therefore the mannequin fails when traders are usually not danger impartial. Is that this consider True or False?
True
False
Can’t be decided with the data given
[2 marks]
Briefly clarify why the hedge ratio is known as a Holy Grail in possibility pricing framework.
[3 marks]
Suppose the present inventory value is $70, after six months, it both goes up by the issue U=1.2809 or it goes down by the issue D= zero.6586. The choice matures after T=zero.5 yr, a greenback invested within the cash market account earns repeatedly compounded risk-free price of 5% per yr.
Suppose the choice is at-the-money, decide the European name worth by utilizing the artificial single-period binomial method.
[2.5 marks]
Suppose the market name value is $eight. Is there an arbitrage alternative? Clarify how the arbitrage alternative could be exploited.
[2.5 marks]
[Question 5 = 10 marks]
Question Assignment 6
Within the Black-Scholes-Merton mannequin, calibration is employed to set the delta and gamma values to zero. Is that this assertion True or False?
True
False
Can’t be decided with the data given
[2 marks]
Briefly clarify the implications of Vega hedging within the Black-Scholes-Merton mannequin framework.
[3 marks]
CSL Ltd’s present inventory value is $80, assuming the decision possibility is $15 in-the-money, the time to maturity is 180 days, the historic variance is zero.25 per yr and the risk-free price is 5%.
Utilizing the Black-Scholes-Merton mannequin, decide the decision and put possibility costs.
[2.5 marks]
Decide the brand new name value if CSL pays a dividend yield of eight% per yr. What are you able to say in regards to the name value in c(i) and c(ii)? Is that this per idea?
[2.5 marks]
[Question 6 = 10 marks]
Question Assignment 7
Maintaining all else fixed, the bigger a bond’s maturity, the smaller the bond’s length. Is that this assertion True or False?
True
False
Can’t be decided with the data given
[2 marks]
Briefly talk about two disadvantages in utilizing length as a danger measure for adjustments within the bond value.
[3 marks]
Suppose a coupon paying bond that matures in four years, has a coupon price of 5% % per yr. The bond’s principal is $three,000 and the market value is $1,000.
Utilizing a yield of zero.10 calculate the bond’s length.
[3 marks]
If the yield enhance by zero.0002, use a duration-based formulation to foretell the change within the bond value.
[2 marks]
[Question 7 = 10 marks]
Question Assignment eight
A swap could also be created by combining ahead price agreements and zero-coupon bonds in your portfolio. Is that this assertion True or False?
True
False
Can’t be decided with the data given
[2 marks]
Given swaps are wonderful examples of monetary engineering and could be worthwhile, as a rational investor would you enter a swap contract that you don’t utterly perceive. Clarify your reply.
[3 marks]
Suppose an American and Australian corporations enter right into a swap with a three-year time period on a principal of $630 million. The spot trade price for US is $6.three per Australian greenback. American raises 100×6.three=$630 million and offers it to Australia, which in flip raises AUD 100 million and offers it to American agency. American agency pays the Australian agency 5 % per yr on AUD 100 million and Australian pays American eight % per yr on $630 million on the finish of every yr for 3 years.
Time to Maturity (in years) US(Home) Zero-Coupon Bond Worth (USD) Australian (Overseas) Zero-Coupon Bond Worth (AUD)
1 B(1)=$zero.97 B(1)=$zero.92
2 B(2)=$zero.79 B(2)=$zero.88
three B(three)=$zero.93 B(three)=$zero.99
Decide the worth of the USD and AUD leg of the money flows.
[2.5 marks]
Decide the worth of the swap of the AUD to the USD.
[2.5 marks]
[Question 8 = 10 marks]
Finish of Examination
