2000 79 WSU 2021 Autumn Weekly Homework - WEEK 12 PDF

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answer of home work week 12...

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Derivatives Weekly Answers Autumn 2021 – Week 12 1. Hedge Beta Vs F Vf N

1.65 85,000,000, as this is the amount of exposure to be hedged (I am buying in the future, so I buy futures today) 6815 170,375 Buy 1.65 x 85m/170375 = 823 contracts

2. Partial Hedge Beta 1 Hedge ratio Vs F Vf N

1.00 10% 2,200,000,000 6927 173,175 Sell 0.10 x 1 x 2.2bn/173175 = 1270 contracts

3. Adjust Beta Beta 1 Beta 2 Vs F Vf N

0.95 1.20 2,500,000,000 6897 172,425 Buy (1.20-0.95) x 2.5bn/172425 = 3625 contracts, ie buy 3625 SPI200 contracts

4. Sources of basis risk: a. Hedge ratio does not equal value of the portfolio to be hedged b. Hedging position isn’t held to expiry of the contract c. Activity in physical market does not occur at expiry of the derivative d. Specifications of physical commodity does not match derivative contract i. Managed through dynamic hedging strategies such as volatility matching

5. Volatility matching Face Today Maturity Term Coupon Futures Yield Coupon date Previous coupon F D I V N G f/d P/$100 Price Volatility

6. Prices a. b. c. d. e.

Bond $175m 17/8/2020 7/12/2026 6.3 1.15% 0.95% 7/12/20

Futures $100,000

A1

A2

B1 $100,000

B2 $100,000

3 6.00% 99.12 0.880%

6.3 1.15%

6.3 1.15%

0.45%

1.45%

3 6.00% 99.62 0.38%

3 6.00% 98.62 1.38%

112 183 0.00225 0.99775505 12 0.575 0.61202186 104.570

112 183 0.00725 0.99280218 12 0.575 0.61202186 98.421

0.0019 0.9981036 6 3

0.0069 0.99314728 6 3

116.748

113.531

7/6/20 112 183 0.00475 0.99527246 12 0.575 0.61202186 101.444 177,527,000 2,947 sell

0.0044 0.99561928 6 3

115,126.19

SPI200: 7026 BAB: 99.96 3-Year: 99.775 5-Year: 99.240 10-Year: 98.335

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