Quiz 2019, answers PDF

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THE UNIVERSITY OF NEWCASTLE NEWCASTLE BUSINESS SCHOOLACFI3130 DERIVATIVE SECURITIES - 2019Mid-Semester Quiz – 12 April 2019SOLUTIONSSTUDENT NAME:STUDENT NUMBER:INSTRUCTIONS:This is a CLOSED-BOOK quiz. Memory aids, as defined by University of Newcastle policy, may NOT be used.The duration of the quiz...

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THE UNIVERSITY OF NEWCASTLE

NEWCASTLE BUSINESS SCHOOL

ACFI3130 DERIVATIVE SECURITIES - 2019 Mid-Semester Quiz – 12 April 2019 SOLUTIONS STUDENT NAME: STUDENT NUMBER: INSTRUCTIONS: This is a CLOSED-BOOK quiz. Memory aids, as defined by University of Newcastle policy, may NOT be used. The duration of the quiz is 90 minutes. The quiz will begin at precisely 9.15 am. Answer all eighteen (18) questions. Questions 1 to 15 are worth 2 marks each. Use the General Purpose Answer Sheet to answer these questions. ENSURE THAT YOUR NAME AND STUDENT NUMBER (IDENTIFICATION NUMBER) IS ENTERED ON THE GENERAL PURPOSE ANSWER SHEET. For each question, place a mark in the most correct answer. There is only one correct answer.

Answer questions 16, 17 and 18 in the spaces provided. These three questions are worth a total of 20 marks.

2 Question 1 Which of the following is functions are undertaken by the clearing house? a) Establish and collect deposits. b) Call in margins as required. c) Apportion gains and losses. d) Two of statements a, b and c are correct. e) All of statements a, b and c are correct.

Question 2 Individuals and companies who enter into contracts in order to take advantage of perceived short-term excesses of supply or demand are known as: a) Speculators. b) Hedgers. c) Dealers. d) Scalpers. e) Arbitrageurs.

3 Question 3 During a period of extreme uncertainty such as the Global Financial Crisis, deposits on futures contracts are most likely to: a) Stay the same until the level of uncertainty falls back down. b) Increase. c) Decrease. d) Stay the same because the level of deposits are set by the Government. e) Decrease initially until the level of uncertainty falls back down, at which time level of deposits will be increased back to their original levels.

Que s t i on4 Which form of speculation involves holding a futures contract for the shortest period of time? a) Day Trading. b) Overnight position taking c) Scalping. d) Scalping or day trading depending on the commodity underlying the futures contract. e) Day trading or overnight position taking depending on the commodity underlying the futures contract. Question 5 On 4 March 2019, the quoted price of the June 2019 90-day bank bill futures contract was 98.15. Michael Kennedy believed that interest rates would increase over the next month and he entered into three bank bill futures contracts in a position consistent with that view. On 11 March 2019, he closed out his position at a quoted price of 98.22. Ignoring transaction costs, how much has Michael Kennedy made (or lost)? The 90-day bank bill futures contract has a face value of $1 million. a) $995,630.14 b) -$513.20 c) $513.20 d) $171.07 e) -$171.07 100 - 98.15 = 1.85% or 0.0185 PV = FV/(1+rt) = $1 000 000/(1+ 0.0185x(90/365)) = $995,459.07 100 – 98.22 = 1.78% or 0.0178 PV = FV/(1+rt) = $1 000 000/(1+ 0.0178)x(90/365)) = $995,630.14 If believe r increase  price decrease therefore sell at $995,459.07 and buy back at $995,630.14 Three contract = 3 times this loss = -$513.20

4 Question 6 On 4 March 2019, the quoted price of the June 2019 10-year bond futures contract was 97.800. Thomas Lonigan believed that interest rates would decrease over the next month and he entered into two 10-year bond futures contracts in a position consistent with that view. On 11 March 2019, he closed out his position at a quoted price of 97.970. Ignoring transaction costs, how much has Thomas Lonigan made (or lost)? The 10-year bond futures contract has a face value of $100,000, and offers a coupon payment of 6% per annum payable half-yearly. a) $3645.20 b) -$1822.60 c) $1822.60 d) -$3645.20 e) $1882.60 100 – 97.8 = 2.2% per annum or 1.1% per half year PV = $3000 x ((1 – 1 / (1+0.011)20)/0.011) + $100 000 / (1 + 0.011)20 = $133 943.78 100 – 97.97 = 2.03% per annum or 1.015% per half year PV = $3000 x ((1 – 1 / (1+0.01015)20)/0.011) + $100 000 / (1 + 0.01015)20 = $135 766.20 If believe r decrease  price increase therefore buy $133 943.78 and sell at $135 766.20 Two contracts = 2 times this gain = $3645.20

5 Question 7 On 5 April 2019, the price of the May 2019 30-day interbank cash rate futures contract was 98.545. The Reserve Bank of Australia has a board meeting scheduled for Tuesday 7 May 2019. The cash rate on 5 April 2019 was 1.5 per cent per annum. On 5 April 2019, what was the probability that the cash rate would be cut to 1.25 per cent per annum at its 7 May 2019 meeting? a) 23% b) 77% c) 19% d) 81% e) 49% Price of 98.545  average cash rate for the month of May of 100 – 98.545 = 1.455% First 7 days of May rate will be 1.5% = remaining 24 days 1.25% or 1.5% Therefore (7/31) x 1.5 + p x (24/31) x 1.5 + (1 – p) x (24/31) x 1.25 = 1.455 where p here is probability of no rate change. Solve for p = 77%. Probability of a rate cut = 100% - 77% = 23%.

6 Question 8 Michael Scanlan manufactures dental amalgam using 99.99% pure liquid mercury. There is a futures contract that specifies 100% pure liquid mercury. The current price of 99.99% pure liquid mercury is $1380 per liquid ounce, the current price of 100% pure liquid mercury is $1950 per liquid ounce, and the current futures price for 100% pure liquid mercury is $2000. Michael wants to buy 99.99% pure liquid mercury in three weeks’ time and enters into a futures contract to protect himself against price changes. In three weeks’ time, the price of 99.99% pure liquid mercury is $1423 per liquid ounce, the price of 100% pure liquid mercury is $1940 per liquid ounce, and the futures price for 100% pure liquid mercury is $2038. Due to specification differences, Michael has made a gain (or loss) of: a) $2 b) -$3 c) -$53 d) -$5 e) -$2 Initial specification difference = $1950 - $1380 = $570 Final specification differences = $1940 - $1423 = $517 The mercury that Michael Scanlan required became more expensive relative to the mercury relating to the futures contract by $53. Due to specification differences, Michael has made a loss of $53. Question 9 Wa n n a h e d g eLt di safin a n c ec o mpa n yt ha ti si n t e n d i n gt ol e n dmo n e yi nt h ef u t ur ea n di ti s c o n c e r n e dt ha ti n t e r e s t e dr a t e sa r eg o i n gt of a l l .I t sh e d gi n go ft h i sa c t i v i t ywi l lb e s tb e d e s c r i b e db ywh i c hoft h ef ol l o wi n gs t a t e me n t s : a )I ti ss h o r tt h es po tma r k e ta n dwi l lt a k eal o n gpo s i t i o ni nt h ef u t u r e sma r k e t , t h e r e f o r e b e c o mi n gas h or th e d g e r . b )I ti sl o n gt hes p otma r k e ta n dwi l lt a k eas h o r tp o s i t i o ni nt h ef u t u r e sma r k e t , t h e r e f or e b e c o mi n gas h or th e d g e r . c )I ti ss h o r tt h es po tma r k e ta n dwi l lt a k eal o n gpo s i t i o ni nt h ef u t u r e sma r k e t , t h e r e f o r e b e c o mi n gal o n gh e d g e r . d )I ti sl o n gt h es p o tma r k e ta n dwi l lt a k eas h o r tp os i t i oni nt hef u t u r e sma r k e t , t h e r e f o r e b e c o mi n gal o n gl e d g e r . e )No n eoft h ea b o v es t a t e me nt si sc or r e c t .

Que s t i on1 0 Jane Oxley manufactures dental amalgam using 99.99% pure liquid mercury. There is a futures contract that specifies 100% pure liquid mercury. The current price of 99.99% pure liquid mercury is $1380 per liquid ounce, the current price of 100% pure liquid mercury is $1950 per liquid ounce, and the current futures price for 100% pure liquid mercury is $2000.

7 Jane Oxley wants to buy 99.99% pure liquid mercury in three weeks’ time and enters into a futures contract to protect himself against price changes. In three weeks’ time, the price of 99.99% pure liquid mercury is $1423 per liquid ounce, the price of 100% pure liquid mercury is $1940 per liquid ounce, and the futures price for 100% pure liquid mercury is $2038. Due to basis risk, Jane has made a gain (or loss) of: a) $2 b) -$3 c) $48 d) -$5 e) -$2 B (0) = S (0) – F (0) = $1950 - $2000 = -$50 B (1) = S (1) – F (1) = $1940 - $2038 = -$98 Change in basis for a long hedger = B (0) – B (1) = -$50 - -$98 = $48. Question 11 As a result of transaction costs, it is possible for the spot price of the commodity on the maturity date of the futures contrast less the price of the futures contract on the maturity date of the contract to be: a) Greater than but never less than zero. b) Less than but never greater than zero. c) Greater than or less than zero. d) None of the above statements is correct. e) More than one of the above statements are correct. Transaction costs mean that the spot price may be greater than or less than the futures price. Question 12 Which one of the following statements with respect to futures markets is correct? a) Open interest must always be greater than daily volume traded. b) Open interest must always be less than daily volume traded. c) Open interest may be greater than, less than, or equal to daily volume traded. d) Open interest may be greater than or less than but never equal to daily volume traded. e) None of the above statements is correct.

8 Question 13 If the current spot price of silver is $984 and the carrying costs related to a silver futures contract are $12, then the current futures price must be: a) Less than or equal to $966. b) Less than or equal to $988. c) Less than $996. d) Equal to $988. e) Less than $988. F...