Questions -

Q1. KMW, Inc. plans to pay a dividend of $0.50 per share both 3 and 6 months from today. KMW's share price today is $36.00 and the continuously compounded quarterly interest rate is 1.5%. What is the price of a 6-month prepaid forward contract, which expires immediately after the second dividend?

(a) $35.00

(b) $35.02

(c) $36.98

(d) $37.00

Q2. The current currency spot rate is $1.31 per euro. If dollar denominated interest rates are 3.0% and euro denominated interest rates are 4.0%, what is the likely dollar per euro exchange rate for a 2 year forward contract?

(a) $1.28

(b) $1.30

(c) $1.31

(d) $1.33

Q3. The S&P 500 Index is priced at $950.46. The annualized dividend yield on the index is 1.40%. What is the price of a 6-month prepaid forward contract on the S & P 500 Index?

(a) $943.83

(b) $950.00

(c) $964.26

(d) $984.21

Q4. HAW, Inc. plans to pay a $1.10 dividend per share in 3 months and a $1.15 dividend in 6 months. HAW's share price today is $45.60 and the continuously compounded quarterly interest rate is 2.1%. What is the price of a forward contract, which expires immediately after the second dividend?

(a) $45.28

(b) $45.96

(c) $45.60

(d) $46.24

Q5. The S&P 500 Index is priced at $950.46. The annualized dividend yield on the index is 1.40%. The continuously compounded annual interest rate is 8.40%. What is the price of a forward contract that expires 9 months from today?

(a) $937.48

(b) $942.66

(c) $984.36

(d) $1001.69

Q6. Which of the following statements does NOT accurately reflect the relationship between securities and synthetic forward contracts?

(a) Forward = stock - zero coupon bond

(b) Zero coupon bond = stock - forward

(c) Prepaid forward = forward - zero coupon bond

(d) Stock = forward + zero coupon bond

Q7. The S&P 500 Index price is 1925.28 and its annualized dividend yield is 2.40%. LIBOR is 3%. How many futures contracts will you need to hedge a $25 million portfolio with a beta of 1.9 for one year? Show your work!

Q8. Interest rates on the U.S. dollar are 5.4% and euro rates are 4.6%. Given a dollar per euro spot rate of 0.918, what is the 6-month forward rate ($/E)?

(a) 0.912

(b) 0.917

(c) 0.922

(d) 0.934

Q9. What is the process involved in creating a cash-and-carry strategy?

Q10. Name some advantages that futures contracts have over forward contracts.

Q11. Which of the following terms most accurately describes the current forward curve for soybeans over the next two years?

(a) Contango

(b) Backwardation

(c) Contango and backwardation

(d) None of the above

Q12. Explain how a negative correlation between agricultural production and commodity prices creates a natural hedge.

Q13. Two months from today you plan to borrow $3 million for 6 months at LIBOR. You hedge your interest rate risk with a euro dollar futures contract priced at 93.6. If settled in arrears, what is your payment if the 6-month LIBOR is 2.5% in two months?

Q14. What is the pure yield curve and why is it common to present coupon-based yield curves in practice?

Q15. IBM and AT&T decide to swap $1 million loans. IBM currently pays 9.0% fixed and AT&T pays 8.5% on a LIBOR + 0.5% loan. What is the net cash flow for IBM if they swap their fixed loan for a LIBOR + 0.5% loan and LIBOR rises to 8.5%?

(a) -$50,000

(b) $50,000

(c) -$90,000

(d) 0

Q16. Describe briefly the concept of Bond Duration.

Q17. The S&P 500 Index price is 1492.28 and its annualized dividend yield is 2.30%. LIBOR is .2%. How many futures contracts will you need to hedge a $240 million portfolio with a beta of 1.16 for one year? (Show your Work)

Q18. An investor wants to hold 200 euro two years from today. The spot exchange rate is $1.31 per euro. If the euro denominated annual interest rate is 3.0% what is the price of a currency prepaid forward?

(a) $200

(b) $206

(c) $231

(d) $247

Q19. The premium on a call option on the market index with an exercise price of $50 is $1.30 when originally purchased. After 3 months the position is closed and the index spot price is $52. If interest rates are 0.75 % per month, what is the Call Profit?

Q20. Discuss the concepts of duration and convexity.