Question no 1

Expected values S&P 500 index value LIBOR today 4739.12 4.1% In 6-months 5286.86 4.5% In 12-months 5440.76 4.8% Meanwhile, the US key interest rates are 4.1%, 2.2% in UK and 0.5% in Japan and are expected to remain unchanged over next 1 year. Required: I) Name and briefly discuss any risk factors related to fund's allocations, that should be hedged against. [4 marks) ll} Discuss possible ways of hedging the currency risk associated with fund allocations? [6 marks) Ill} Calculate the number of 5&P Equity Index futures and Nikko Bond Performance Index futures you must buy or sell to achieve the desired target asset allocations of bonds and equities. [6 marks) IV) Determine a cross currency swap strategy? [5 marks) V) Determine the 6-month and 12-month forward exchange rates for $35 and JPYIE? [4 marks) VI) Explain the Uncovered Interest Parity rate condition and possible arbitrage if this condition fails? [5 marks) Question 2: You have been assigned a new fund to lead. The fund is based in UK. The fund is currently invested equities (50%) and bonds {50%) over different international indexes. The equityr investments are in USD. The entire exposure of equity is in US 3&F' 500 stocks. Current market value $ 270 million Bonds investments are entirely in Japanese market. Current market value JPY 31.362 billion Nikko Bond Performance Index composite The current exchange rates are: - $f spot rate = 1.35 - JPYf spot rate 2155.81 You expect the US equity securities to rise in value over the next one year. _lr_i_g_r_c_l_e_r__t_g avoid substantial transaction costs now and in two years, you have decided to use derivatives to synthetically alter the fund's asset allocation. You have decided to increase fund's equity allocation to 60% and reduce bond allocation to 40%. However, you wish to keep the current beta of the equity portfolio and the current duration of the bond portfolio at the same level. To gain from the expected equity value appreciation, you consider the following 2 options: Option 1: under consideration to achieve target allocations, is the use of future contracts. The Beta of equity futures is 1.15 and current contract price of $10,000. The duration of bond futures 5.50 and contract price of JPY 1000,500. Option 2: To egterjgjg a swap on S&P 500 equity index returns with a N.P equal to amount of desired increase in equity allocation. The terms of swap entails paying a oating rate equal to LIBOR + 30 bps and receive the return on equity index. The swap has tenor of one year and semi-annual settlements. The settlements may take place in 5, JPY or $. To settle the swap payments, assume $ to exchange rates will remain xed at the current level over the 12 months