ACFI3130 Mid-Semester PDF

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THE UNIVERSITY OF NEWCASTLE NEWCASTLE BUSINESS SCHOOLACFI3130 DERIVATIVE SECURITIES - 2020Coded answers in Red, Correct answers in YellowQuestion aOn 6 April 2020, the quoted price of the June 2020 90-day bank bill futures contract was 99. Mick Jagger believed that interest rates would decrease over...

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THE UNIVERSITY OF NEWCASTLE

NEWCASTLE BUSINESS SCHOOL

ACFI3130 DERIVATIVE SECURITIES - 2020 Coded answers in Red, Correct answers in Yellow Question a On 6 April 2020, the quoted price of the June 2020 90-day bank bill futures contract was 99.70. Mick Jagger believed that interest rates would decrease over the next month and he entered into two bank bill futures contracts in a position consistent with that view. On 17 April 2020, he closed out his position at a quoted price of 99.80. Ignoring transaction costs, how much has Mick Jagger made (or lost)? a) $999,507.09. b) -$492.54. c) $492.54. d) $246.27. e) None of the above answers is correct. The coded answer was b. The correct answer was c.

Question b On 3 February 2020, the quoted price of the March 2020 90-day bank bill futures contract was 99.19, and the yield on 90-day bank accepted bills was 0.86 per cent per annum. On 10 February 2020, the quoted price of the March 2020 90-day bill futures contract was 99.07, and the yield on 90-day bank accepted bills was 0.92 per cent per annum. The basis on 3 February was: a) -$613.91 b) $1350.40 c) -$1231.36. d) -$726.49 e) None of the above answers is correct. Quoted price of 99.19 implies a simple per annum yield of 0.0081 or 0.81% per annum Basis = Spot – Futures = $1,000,000/(1+0.0086*(90/365)) - $1,000,000/(1+ 0.081*(90/365)) = $997,883.94 - $998,006.72 = -$122.78 The coded answer was a. The correct answer was e.

2 Question c Suppose that on 11 May 2020, the All Ordinaries Index closed at 5821 points. Furthermore, interest rates are zero and are certain to remain at zero for the next 12 months. While dividend payments are low, they are certain to continue. In the absence of transaction costs, on 11 May 2020, to prevent arbitrage, the dollar price of the September 2020 SPI 200 futures contract must be: a) Greater than $5821. b) Equal to $5821. c) Less than $5821. d) Greater than or equal to $5821. e) None of the above answers is correct. The contract price must be less than 5821. F = [S – PV(D)] (1 + r) page 542 of the textbook. Note r = zero, and dividends low. Therefore the dollar price will be equal to a number a little less than 5821 x $25 = a number a little less than $145,525. The coded answer was e. However, the correct answer was a) greater than $5821. However, the answer e) “None of the above answers is correct” was also accepted, given that a number a little less than $145,525 is far greater than $5821. Note students who answered a) or e) will be marked are correct.

Que s t i ond Aarohi Agrawal wants to buy low-grade gold in three weeks’ time and enters into a futures contract. The futures contract is for high-grade gold. The current price of low-grade gold is $1380 per ounce, the current price of high-grade gold is $1950 per ounce, and the current futures price for high-grade gold is $2000. Aarohi enters into a futures contract to protect herself against price changes. In three weeks’ time, the price of low-grade silver is $1433 per ounce, the price of high-grade silver is $2000 per ounce, and the futures price for 100% high-grade silver is $2048. Due to basis risk, Aarohi has made a gain (or loss) of: a) -$12. b) -$3. c) $12. d) -$15. e) None of the above answers is correct. Futures price increased by $48 (a gain for the long hedger). Underlying spot increased by $50 (a loss for a short ledger). Equal loss $2 The coded answer was a). The intended correct answer was e. Most students answered correctly e). However, there was also an error in the use of the commodity gold and then silver. Therefore, the few students who did not answer e) still received the marks. Note including those that answered a.

3 Que s t i one Juan Garcia wants to buy low-grade gold in three weeks’ time and enters into a futures contract. The futures contract is for high-grade gold. The current price of low-grade gold is $1380 per ounce, the current price of high-grade gold is $1950 per ounce, and the current futures price for high-grade gold is $2000. Juan enters into a futures contract to protect himself against price changes. In three weeks’ time, the price of low-grade silver is $1433 per ounce, the price of high-grade silver is $2000 per ounce, and the futures price for 100% high-grade silver is $2048. The net result of the hedging is a gain (or loss) of: a) -$12. b) -$3. c) $12. d) -$15. e) None of the above answers is correct. Gain on futures equal $48, Loss on spot = $53. Loss equal $5. The coded answer was d). The intended correct answer was e. Most students answered correctly e). However, there was also an error in the use of the commodity gold and then silver. Therefore, the few students who did not answer e) still received the marks. Note including those that answered d.

Question f The spot price of gold is $2373. The gold futures price for delivery in 3 months’ time is $2410. Interest rates are 0.1 per cent per month (compound). It costs $3 per ounce per month (payable for the whole period, in advance) to store and insure gold. Each futures contract covers one ounce of gold. The arbitrage profit that can be earned in 3 months’ time is: a) $217.29. b) $26.29. c) $30.91. d) $23.29. e) None of the above answers is correct. Buy today and pay storage and insurance. Cost $2373 + $3 * 3 = $2382. Borrow this amount. In three months’ time need to repay $2382 x (1.001)^3 = $2389.15 Sell for $2410. Arbitrage profit = $20.85.

4 Question g The spot price of gold is $3373. The gold futures price for delivery in 4 months’ time is $3410. Interest rates are 0.2 per cent per month (compound). It costs $2 per ounce per month (payable for the whole period, in advance) to store and insure gold. Each futures contract covers one ounce of gold. The arbitrage profit that can be earned in 4 months’ time is: a) $217.29. b) $26.29. c) $30.91. d) $23.29. e) None of the above answers is correct. Buy today and pay storage and insurance. Cost $3373 + $2 * 4 = $3381. Borrow this amount. In four months’ time need to repay $3381 x (1.002)^4 = $3408.13 Sell for $3410. Arbitrage profit = $1.87. Question h The spot price of gold is $4373. The gold futures price for delivery in 5 months’ time is $4410. Interest rates are 0.05 per cent per month (compound). It costs $1 per ounce per month (payable for the whole period, in advance) to store and insure gold. Each futures contract covers one ounce of gold. The arbitrage profit that can be earned in 5 months’ time is: a) $217.29. b) $26.29. c) $30.91. d) $23.29. e) None of the above answers is correct. Buy today and pay storage and insurance. Cost $4373 + $1 * 5 = $4378. Borrow this amount. In five months’ time need to repay $4378 x (1.005)^5 = $4488.55 Sell for $4410. This process results in a loss. An arbitrage profit is not possible....