Questions and Answers of Derivatives Principles And Practice

The Bryce Investment Trust Company plans to liquidate part of its stock portfolio in June. The company is bullish but would like to set a floor on the portfolio sale as a defensive strategy. The
The Keynes Investment Company is expecting a $\$ 100$ million inflow of cash in June and is planning to invest the cash in a portfolio of stocks with a $\beta=1.5$. Keynes Investments is
The Hunter Investment Company manages a well-diversified equity fund. The current value of the portfolio it manages is $\$ 100$ million and the portfolio has a beta of 1.0. Hunter Investment is
Suppose ESPN (Disney) is expecting revenues of $£ 6,250,000$ next April (one year from now: $T=1$ ) from its United Kingdom Rugby sports productions division. ESPN expects the dollar price of
ESPN owes the United Kingdom Rugby Association $£ 6,250,000$ as payment for the exclusive licensing right to produce rugby matches on the European and US cable markets. ESPN expects the dollar
Ms. Hunter is the chief financial officer for Atlanta Developers. In January, she estimates that the company will need to purchase 300,000 square feet of plywood in June to meet its material needs on
In May, Mr. Smith planted a wheat crop that he expects to harvest in September. He anticipates the September harvest to be 100,000 bushels. While he expects wheat prices to increase, he would still
A fixed-income fund manager plans to sell $20 \$ 100,000$ face value T-bonds from her government fund in March. The T-bonds she plans to sell pay 3\% interest and are currently priced at 105.At the
The O'Brien Beverage Company is considering capping a two-year $\$ 10$ million floating-rate loan from First National Bank with a strip of Eurodollar puts. O'Brien's floating-rate loan starts on
Northern Trust is considering setting a floor on a two-year $\$ 10$ million investment in a floating-rate note (FRN) from First National Bank with a strip of Eurodollar calls. The FRN pays LIBOR
Suppose Eastern Bank offers Gulf Refinery a $\$ 150$ million floating-rate loan along with a cap to finance the purchase of its drilling equipment. The floating-rate loan has a maturity of two
Southern Trust is planning to invest $\$ 150$ million in a Commerce Bank two-year floating-rate note paying LIBOR plus 150 basis points. The floating-rate note has a maturity of two years, starts
Using the Bloomberg OSA screen, evaluate a stock insurance position and a short-range forward contract for a selected stock. Assume you own 100 shares of the stock and plan to sell it or hedge its
Using the Bloomberg OSA screen, evaluate a cap and long-range forward contract on a stock purchase of a selected stock. Assume you plan to buy 100 shares of the stock at the expiration of the
Using the Bloomberg OSA screen, evaluate an insurance and short-range forward position to hedge the futures value of 100 shares of a selected equity ETF (e.g., S\&P 500 Spider, SPY). If there are
Evaluate a future sale of a commodity such as wheat with a floor and short-range forward positions.a. Select a commodity that has a futures options contracts on it.b. Use the SECF screen to find the
Evaluate a future purchase of a selected commodity like crude oil with a cap and long-range forward position using Bloomberg's OSA screen.a. Select a commodity that has futures options contracts on
Access Bloomberg information on a currency futures contract with options: type CTM to bring up the "Contract Table Menu," click "Categories" and "Currency," search for CME-listed futures on the Menu
On the futures' screen, use OSA to load the currency futures' options contracts. Using OSA, generate profit graphs for the following positions:a. Long position in the futures and futures putb. Short
Evaluate an equity mutual fund position with at least 10,000 shares that is to be sold or valued at a future date and hedged with a floor and short-range forward positions.a. Use the SECF screen to
Construct your own equity portfolio and then analyze it using PORT and also as an index created using the CIXB screen. Guidelines:- In constructing your own portfolio, use the Equity Search screen
Using the Bloomberg OSA screen, evaluate an insurance and short-range forward position to hedge the futures value of the portfolio you constructed in Exercise 9 (or another portfolio you have
Access Bloomberg information on a T-notes futures contract with options. Bloomberg sequence: type CTM to bring up the "Contract Table Menu," click "Categories" and "Bonds," search for CBT-listed
Using the Bloomberg MARS screen, load the futures, futures put, futures call, and cheapest-to-deliver notes on the T-note futures contract you analyzed.For a guide, see sections "Bloomberg Hedging
Construct a portfolio of investment-grade corporate bonds and US Treasuries using the PRTU screen. After constructing the bond fund, evaluate the portfolio in PORT. Guidelines:- Use the Bloomberg
Access Bloomberg information on a CME Eurodollar futures contract. Bloomberg sequence: Type CTM to bring up the "Contract Table Menu," click "Categories" and "Interest Rates," search for CMElisted
On the futures screen, use OSA to load the futures' options contracts for the options you selected in Exercise 16.Using OSA, generate profit graphs for the following positions:a. Long position in the
Explain how the clearinghouse would record the following:a. Mr. A buys a September S\&P 500 futures contract from Ms. B for 2,000 on June 20.b. Mr. D buys a September S\&P 500 futures contract from
Suppose on March 1 you take a long position in a June S\&P 500 futures contract at 2,000 with a $\$ 250$ multiplier.a. How much cash or risk-free securities would you have to deposit to satisfy an
The Bryce Investment Trust Company plans to liquidate part of its stock portfolio in June. It would like to hedge the portfolio sale. The portfolio the company plans to sell is well diversified, has
The Keynes Investment Company is expecting a $\$ 20$ million inflow of cash from one of its investment clients in June and is planning to invest the cash in a portfolio of stocks with a
The Hunter Investment Company manages a well-diversified equity fund. The current value of the portfolio it manages is $\$ 100$ million and the portfolio has a beta of 1.5 . Hunter Investment is
Kendall Investment Company just received information that General Pharmaceutical (GP) might be introducing a new acne drug in June. In response to the information, Kendall decided to buy 10,000
Determine the equilibrium price of a December S\&P 500 futures contract. Assume the current spot S\&P 500 index is at 2,000 , the annual risk-free rate is $2.00 \%$, dividends worth $\$20.00$ at
The Zuber Hedge Fund has formed a proxy portfolio that it is using to identify arbitrage opportunities using index arbitrage strategies. The proxy portfolio is worth $\$ 100$ million, has a beta of
Select an equity index such as the S\&P 500 (SPX) or a sector index. To find your index, use SECF (SECF ); Category: Index/Stat. Upload the index's Menu screen (Ticker ), and evaluate it using the
Access Bloomberg information on a broad-based CME or CBT equity index futures contract like the S\&P 500 or the Dow Jones: type CTM to bring up the "Contract Table Menu," click "Categories" and
Access Bloomberg information on a sector or narrow-based equity index futures contract, such as a sector index like the S\&P E-Mini Technology Index (IXPA): type CTM to bring up the "Contract Table
Using the GP screen, examine the historical prices of a broad-based equity index futures contract you selected in Exercise 2. Select a time period that the contract was active.Access Bloomberg
Using the GP screen, examine the historical prices of a narrow-based equity index futures contract you selected in Exercise 3. Select a time period that the contract was active.Access Bloomberg
Using the Bloomberg HRA regression screen estimate the relation between a narrow-based index (e.g., a sector index) and broad-based index (e.g., S\&P 500, SPX). Load your selected sector spot index
Examine an ex-post long hedging position for a future purchase of 1,000 shares of a selected ETF (e.g., S\&P 500 Spider, SPY).a. Select a futures contract on the ETF you plan to purchase (e.g., one
Examine an ex-post short hedging position for a future sale of 1,000 shares of a selected ETF (e.g., S\&P 500 Spider, SPY).a. Select a futures contract on the ETF you plan to sell (e.g., one of the
Construct your own equity portfolio and then analyze it using PORT and as an index created from CIXB. Guidelines:- In constructing you own portfolio, consider using the equity search screen (EQS),
Examine an ex-post portfolio beta enhancement or reduction (market-timing) strategy for the portfolio you created in Exercise 10.a. Select one futures contract on the S\&P 500 (SPA) to go long or
Estimate the current equilibrium price on the S\&P 500 equity index futures contract (SPA) based on the Spider S\&P 500 ETF (SPY).\[f_{0}^{*}=S_{0} e^{\left(R_{f}-\psi\right) T}\]Bloomberg
Explain the differences between forward, futures, and options contracts.
Define and explain the functions provided by futures exchanges.
Explain how the clearinghouse would record the following:a. Mr. A buys a September wheat futures contract from Ms. B for $\$ 4.00 /$ bu. on July 20.b. Mr. D buys a September wheat futures contract
Explain why the price on an expiring futures contract must be equal or approximately equal to the spot price on the contract's underlying asset.
Suppose on March 1 you take a long position in a June crude oil futures contract at $\$ 50 /$ barrel (contract size = 1,000 barrels).a. How much cash or risk-free securities would you have to
What is the major economic justification of the futures market?
Ms. Hunter is the chief financial officer for Atlanta Developers. In January, she estimates that the company will need to purchase 300,000 square feet of plywood in June to meet its material needs on
In May, Mr. Smith planted a wheat crop, which he expects to harvest in September. He anticipates the September harvest to be 10,000 bushels and would like to hedge the price he can get for his wheat
What spread positions would you form in the following cases:a. In July, you expect the spot price of wheat to increase, and September and October wheat futures contracts are available.b. The
Define the basis and its relationship to the time to expiration.
Suppose the spot price of a bushel of wheat is $\$ 2.00$, the annual storage cost is $\$ 0.30$ per/bushel, the risk-free rate is $8 \%$, and the costs of transporting wheat from the destination
Suppose the following conditions are present:- The forward price on the March lumber contract is $f_{T 1}=$ $\$ 0.24 / \mathrm{sq}$. ft.- The March forward interest rate on a three-month loan is
What would be the July 1 value of a September forward contract initiated on June 1 to purchase crude oil for $\$ 50 /$ barrel on September 1, if the same contract were available on July 1, but with
Briefly comment on the following:a. The importance of the delivery procedure on futures contracts, even though most futures contracts are closed by offsetting positions.b. The advantages and
Short-answer questions:a. What was the primary factor that contributed to the dramatic growth in the futures trading over the last 30 years?b. What is a hedge called in which the asset underlying the
Access Bloomberg information on a CBT futures contract on an agriculture commodity such as wheat or corn contracts using the CTM screen: Type CTM to bring up the "Contract Table Menu," click
Access Bloomberg information on a futures contract on energy, such as crude oil, coal, or natural gas contracts, using the CTM screen: Type CTM to bring up the "Contract Table Menu," click
Use the SECF screen to find the tickers for a select futures contracts and the spot prices related to the contract: SECF ; select "Commodities" from the "Category" dropdown, select the type of
Using the GP screen, examine the historical prices of the agriculture futures contract . Select a time period that the contract was active.a. Select a period in which you would have taken a long
Using the GP screen, examine the historical prices of the energy futures contract you. Select a time period that the contract was active.a. Select a period in which you would have taken a long
Using the GP screen, examine the historical prices of one or more of the contracts. Select a time period that the contract was active.a. Select a period in which you would have taken a long position
Examine an ex-post long hedging position for a futures commodity purchase.a. Select a futures contract and use the expiration date on the futures contract as the date of your purchase.b. Use the
Examine an ex-post short hedging position for a future commodity sale.a. Select a futures contract and use the expiration date on the futures as the date of your sale.b. Use the "Chart" screen (Chart
Using the Bloomberg HRA Regression screen, estimate the relation between two commodities in the same category (e.g., precious metal). Load your selected spot prices (e.g., SLVR for the silver), and
Using the Chart screen (Chart ), examine the intercommodity spread you.Note than the contracts have to have the same expiration and may need to be adjusted for possible differences in the size of
Examine the cost of carrying corn or soybeans for different periods using Bloomberg's Grain Cash and Carry Analysis (GRCC) screen.
Given the following:- $E_{0}=\$ 1.50 / \mathrm{BP}$- $F_{0}=\$ 1.50 /$ BP (one-year forward contract)- $R_{\mathrm{US}}=2 \%$ (annual)- $R_{\mathrm{BP}}=2 \%$ (annual)a. Explain how you would
Mr. B just signed a contract to play professional basketball in Mexico for the Mexican Stars. The team owner has agreed to pay his living expenses for two years and an annual salary of $2,000,000$
The Nancy Jewelry Company is a US company with jewelry stores located across the United States. In March, the company signs a contract with Swiss Watch, Inc. to purchase 100,000 watches the following
Suppose ESPN (Disney) is expecting revenues of 6,250,000 BP next April (one year from now: $T=1$ ) from its United Kingdom Rugby sports productions division. Fearing that exchange rates could
A US investor just bought one share of Heineken stock for 200 euros when the dollar/euro spot exchange rate was $\$ 1.20 / €$. The investor expects the stock to pay a dividend worth 5 euros and
A US investor just bought one share of Heineken stock for 200 euros when the dollar/euro spot exchange rate was $\$ 1.20 / €$. The investor expects the stock to pay a dividend worth 5 euros and
Suppose the spot US dollar/euro exchange rate is $\$ 1.20 / €$, the US risk-free rate is $4 \%$ (annual) and the rate paid on euros is $2 \%$.a. Assuming the IRPT holds, what should the
Explain why a risk-neutral investor would be indifferent between a one-year US dollar investment in a risk-free security at $3 \%$ and a one-year British pound investment at $5 \%$ if the
Given the following euro and British pound spot exchange rates: $0.80 € / \$ 1$ and $0.70 £ / \$ 1$ :a. What is the equilibrium $£ / €$ ?b. Describe the triangular arbitrage strategy a US
Select a currency of interest (use SECF (SECF ); Category: Currencies, Spots tab. Upload the currency's Menu screen (Ticker ), and evaluate it using the following screen:a. DES: Descriptionb. GP:
Use the SECF screen to find the tickers for a select currency's spot exchange rate, deposit rates, forward rates, and futures: SECF ; Category: "Currencies," type in currency name in the amber "Name"
Access Bloomberg information for a CME-listed currency futures contract: Type CTM to bring up the "Contract Table Menu," click "Categories" and "Currencies," search for CME currency futures on the
Using the GP screen, examine the historical prices of the currency futures contract you selected in Exercise 3. Select a time period that the contract was active.a. Select a period in which you would
Using the Bloomberg HRA Regression screen estimate the relation between two currencies. Load your selected currency (e.g., GBP for the British pound), and then go to the HRA screen for the
Using the Chart screen (Chart ), examine the intercommodity spread you formed in Exercise 5. Note than the contracts have to have the same expiration.a. Use the Chart screen (Chart ) to create
Examine an ex-post long hedging position for a future currency purchase.a. Select a futures contract and use the expiration date on the futures contract as the date of your purchase.b. Use the Chart
Examine an ex-post short hedging position for a future currency sale.a. Select a futures contract and use the expiration date on the futures as the date of your sale.b. Use the Chart screen (Chart )
Select a currency exchange rate with the dollar (GBP for BP), a futures contract on the currency (e.g., British pound expiring in approximately three months), the deposit rate on the currency (e.g.,
What is the main difference between a cash flow CDO and a synthetic CDO?
What is the primary goal of the following tranche holders in a CDO: (a) The A-tranche, (b) The mezzanine tranche,(c) The equity tranche?
In an n-th to default basket, assume there are but two bonds. If the correlation of default between these two bonds increases, then what is the impact on (a) A first-to-default basket(b) A
There are two firms, A and B, with the probability of A defaulting being 0.05. The conditional probability of B defaulting given A defaulted is 1. If the correlation of default of A and B is 0.30,
For a maturity of T = 1 year, let the default probability of a firm be p = 0.1. Define an indicator variable d = 1 if default occurs and d = 0 if default does not occur. (a) What is E(d)? (b) What
Given two firms, if the probability of neither defaulting is 80% and the probability of each defaulting is p1 = 0.1 and p2 = 0.2, what is the probability of both defaulting?
Based on a structural model that assumes a normal distribution of firm value, the distance to default for firm 1 is DT D1 = 2. Likewise, for firm 2, DT D2 = 1. If the correlation of default between
If the expected time to default is four years, what is the probability of default in less than two years?
If you assume that the joint distribution of default times is multivariate normal, then what is the standard deviation of the loss distribution?
Show the steps in Octave that are needed to simulate the losses from this set of issuers using a Gaussian copula that combines a set of Gaussian marginal distributions and report the mean of the loss

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