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30 views

Mid 2016

Uploaded by

indreshnaithani40
Copyright
© © All Rights Reserved
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Download as DOC, PDF, TXT or read online on Scribd
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FIN 530 Derivatives George O.

Aragon
Midterm Fall 2016

Please write your name here:


1. The multiplier for a futures contract on a stock is $250. The maturity of the contract
is 12 months, the current level of the index is 2100, and the risk-free rate is .2% per
month. The dividend yield on the index is .5% per month. Suppose that after one
month, the stock index is at 2120.

a. [10 points] What is the cash flow from the mark to market proceeds on the
contract? Assume you are long one contract. Assume the parity condition
always holds exactly, and treat the interest rates as effective monthly rates, not
continuously compounded rates.

b. [10 points] Suppose that you were originally required to post initial margin of
23000 when you opened your long position. What is the rate of return on
equity in your margin account after one month? How does that compare to the
rate of return on the S&P 500 over the same period?
2. Suppose that capital markets are perfect in the sense that bid-ask spreads are
effectively zero, other trading costs are also zero, short-selling is allowed with no
cost and with full access to proceeds, and borrowing and lending rates are equal.

a. [10 points] If the S&P 500 index is at 1,000 and pays no dividends, and the
semi-annual risk-free interest rate is 3%, what is the usual parity value of the
futures price on a six-month contract?

b. [10 points] If the futures price on the six-month contract is 1040, is there an
arbitrage opportunity? If yes, then design a zero-investment strategy to exploit
the arbitrage opportunity.
3. [20 points] A magnitude 5.0 earthquake shook central Oklahoma on Sunday
evening, damaging several buildings. The quake epicenter was about a mile west of
the town of Cushing, the largest commercial crude oil storage center in North
America and the delivery location of WTI crude oil futures contracts. Cushing is
dotted with hundreds of storage tanks that hold an estimated 54 million barrels of
oil. This quake raised concerns about the stability of oil supplies. Suppose these
worries pertain to short-term supplies, but that no one is concerned the recent
seismic activity will affect supplies at maturities of one year or beyond. What then
would be your forecast for the effect of these worries on (a) spot oil prices, (b) one-
year maturity oil futures prices, and (c) the convenience value of oil? Briefly discuss
your answers.
4. A stock fund manager hold a portfolio of small-cap stocks with beta of 3 and market
value of $10 million. The 1-month S&P 500 futures contract has a multiplier of 250.
The current level of the S&P 500 index is 2000. Neither the small-cap portfolio nor
the S&P 500 pay any dividends. A regression using monthly observations of the
small-cap portfolio and the S&P 500 index reveals a standard deviation of the
regression residual of 0.2%.

a. [10 points] If the manager wishes to fully hedge systematic stock market risk
for the next month, how many S&P 500 futures contracts should she enter?
Should she be long or short these contracts?

b. [10 points] Suppose the manager implements the hedging strategy in part a.
What will be the standard deviation of the return on her hedged portfolio over
the next month?
5. [20 points] The current 12-month interest rate is 6% (annualized, and expressed as
an annual percentage rate). The FRA with a maturity of 24 months (i.e., FRA
12x24) is selling at a fixed rate of 8%. What should be the fixed rate on a two-year,
annual pay, LIBOR swap? (The swap will entail two payments, one in 12 months,
the other in 24 months). Express the swap rate to at least 2 decimal places, e.g.,
7.77%.

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