Posted: September 18th, 2017

Economics

Quiz 1
Problem 1
Mr. X shorts 10 futures contacts of silver (contract size – 5000 oz). The current futures price is $15.758 per ounce. The initial margin is $ 4,599 per contract, the maintenance margin is $ 3, 750 per lot.
a) At what price level would Mr. X receive a margin call

b) At what level would Mr. X be allowed to withdraw $ 5,555 from his margin account?

Problem 2
Carefully explain the difference between the credit risk and the market risk in a financial contract such as a Swap. Describe certain scenarios when credit risk is most prevalent and when it is effectively zero.

Problem 3
Suppose that zero interest rate with continuous compounding are as follows:
Maturity (Years) 1 2 3 4 5
Rate (% per annum) 3.30% 3.66% 3.93% 4.27% 4.63%

Calculate the forward interest rates for the second, third, fourth and fifth years

Year Forward rate
2
3
4
5

Problem 4
Companies X and Y have been offered the following rates per annum on a $ 10 million 5- year investment
Fixed Rate Floating Rate
Company X 4.0% LIBOR
Company Y 4.6% LIBOR

Company X requires a fixed-rate investment; company Y required a floating-rate investment. Design a Swap that will net a bank acting as intermediary, 0.20% per annum and will be equally attractive to X and Y. Draw a graph for your answers.
Problem 5
Give a detailed explanation of how a portfolio manager could use “duration” to hedge the risk in a bond portfolio. What are some of the caveats in hedging a bond portfolio? What metrics should he use to make the hedge most effective?
Problem 6
A portfolio manager has a bond portfolio of $ 10 million. The duration of the portfolio is 7.2 years. The front month T-bond futures are currently at 95-15. The cheapest-to-deliver bind has duration of 8.5 years. How should the portfolio manager immunize the portfolio against changes in interest rates in the near term?

Problem 7
Mr. X currently holds 33,000 shares of a certain stock. The stock is currently trading at: $59.33 per share. He is interested in hedging against short-term movements in the market and decides to use eMini S&P futures to hedge his exposure. The index is currently at; 2065, contract size= $50 times index. Beta of the stock = 0.78. Calculate how many eMini S&P futures contracts are needed to hedge the portfolio against downside price risk.
Problem 8
Carefully explain why the expected loss from a default on a swap is less than the expected loss from the default on a loan with the same principal?

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