Professional Documents
Culture Documents
HONMD1Y Compulsory Assignment 01 2012
HONMD1Y Compulsory Assignment 01 2012
A drop of $1 500 (from 6 000 to margin 4 500) per contract will cause a margin call. This means a drop in
futures price per pound of juice of 1 500/ 15 000 = $0,10 per lb. The futures price thus drops from 160c
per lb to 150c per lb. On the other hand a surplus of $2 000 will arise (which can then be withdrawn) if
the total margin account (for 2 contracts) increases by 2 000, or 1 000 per contract. That is if the futures
price rises by 1 000/15 000 = $0,0667 per lb. The futures price thus rises from 160c per lb to 166,67c per
lb. [4]
T = 1 January 2010. F1 is the forward exchange rate in yen/$ for contract 1 to buy $1m at T.
F2 is the forward exchange rate in yen/$ for contract 2 to sell $1m at T. Let S be the actual exchange rate
at T. Profit/loss = [(F2 − S) + (S − F1)]*106 yen = (F2 – F1) *106 yen. [4]
Sell (forward market) at 1,25 F/$ and buy (futures market) at 0,7980 $/F. Convert the former to $/F:
1/1,25 = 0,8000$/F. So if he sells on the forward market he gets 0,8000$ per franc; on the futures market
not more than 0,7980. Forward market is better. [4]
Using equation (3.5) in Hull, the number of futures contracts that should be shorted is
N* = = 1,3(50 000*30)/(1 500*50) = 26. [2]
Using equation (3.1) in Hull, the minimum variance hedge ratio is h* = . Let xi denote change in S and
and yi denote change in F. First calculate = 1,30; = 2,3594; = 0,96; = 2,4474;
= 2,352. Then calculate ρ, σS, σF, as on p58, Hull (ed. 7) to find: ρ = 0,981; σS = 0,4933;
σF = 0,5116. Finally, h* = 0,946. [6]
(a) Let the price be p and the face value (nominal) be 100. The yield is y = 0,11
Then p = 8 +8 +8 +8 + 108 = 86,80
(b) Duration D = [8 + 2*8 + 3*8 + 4*8 + 5*108 ]
= 4,256 years (use equation (4.12))
(c) From (4.15) we have change in bond price ∆p = −pD∆y = 0,74. The price will increase from
86,80 to 87,54
(d) The yield is now 0,11 – 0,002 = 0,108.
Then p = 8 +8 +8 +8 + 108 = 87,54 [8]
First we calculate the PV of storage costs: storage cost per year per oz = 0,24.
Quarterly amount = 0,06. There are 3 periods in 9 months (0,75 years).
PV = 0,06 + 0,06 + 0,06 = 0,176
Now use (5.11) in Hull: F0 = (9 + 0,176) = 9,89 ($ per oz).
Using a spot price of $15: F0 = (15 + 0,176) = 16,36 ($ per oz). [4]
P = 6 000 000; DP = 8,2; FC = futures contract price = 108 (1 000) = 108 468,75. (See Hull Section
6.2); DF = 7,6. Substitution gives N* = 59,7. This means you should short 60 futures contracts and close
out the position end of July (i.e. in 6 months’ time). [5]
(a) Bond has 15 years and 7 months to maturity which for calculating conversion factor is 15 yrs 6
months or exactly 31 semi-annual periods with coupons. On face value of 100 the semi-annual
coupon is 5; the semi-annual rate is 3%.
Value of bond = + = 140,00. Conversion factor = 1,40.
(b) Bond has 21 years and 4 months to maturity, or 21 yrs and 3 months for calculation. Discount to a
point 3 months away. This gives 42 periods plus first coupon arriving 3 months (0,5 of a semi-
annual period) after discount point. Discount factor is therefore (1,03) i + 0,5 ; semi-annual coupon
is 3,5.
Value of bond = + + = 113,66.
Subtract accrued interest of = 1,75 we get 111,91. Conversion factor = 1,1191
(c) Bond 1: Quoted futures price* Conversion factor = 118,71875*1,4 = 166,2063
Bond 2: Quoted futures price* Conversion factor = 118,71875*1,1191 = 132,8582
Bond 1: Quoted bond price = 169,00. Difference = 2,7937
Bond 2: Quoted bond price = 136,00. Difference = 3,1418
Cheapest to deliver: Bond 1
(d) Assume delivery date for futures is 25 June 2009 and today is 1 January 2009. Cash price
received for Bond 1 on 1 January 2009 = 166,2063 plus accrued interest over 176 days. The semi-
annual period consists of 181 days. Accrued interest = 5* = 4,8619. Therefore
cash price = 171,0682 [10]