FM07
Options, Futures & Other Derivatives
(For CNM Cases)
Assignment – I
Assignment Code: 2016FM07A1 Last date of Submission: 30th April 2016
Maximum Marks: 100
Attempt all questions. All the questions are compulsory & carry equal marks.
Section-A
1. What are the most important aspects of the design of a new futures contract? Explain how margins protect investors against possibility of default?
2. Explain what is meant by a perfect hedge? Does a perfect hedge always lead to a better outcome than an imperfect hedge? Explain.
3. `What is the purpose of the convexity adjustment made to EuroDollar futures rates? Why is it necessary?
4. Suppose Morgan Guaranty, Ltd. is quoting swap rates as follows: 7.75 - 8.10 percent annually against six-month Dollar LIBOR for Dollars and 11.25 - 11.65 percent annually against six-month Dollar LIBOR for British pound sterling. At what rates will Morgan Guaranty enter into a $/£ currency swap?
Section-B
Case Study: The Centralia Corporation’s Currency Swap
The Centralia Corporation is a U.S. manufacturer of small kitchen electrical appliances. It has decided to construct a wholly owned manufacturing facility in Zaragoza, Spain, to manufacture microwave ovens for sale in the European Union. The plant is expected to cost €5,500,000, and to take about one year to complete. The plant is to be financed over its economic life of eight years. The borrowing capacity created by this capital expenditure is $2,900,000; the remainder of the plant will be equity financed. Centralia is not well known in the Spanish or international bond market; consequently, it would have to pay 7 percent per annum to borrow Euros, whereas the normal borrowing rate in the Euro zone for well-known firms of equivalent risk is 6 percent. Alternatively, Centralia can borrow Dollars in the U.S. at a rate of 8 percent.
Questions:
1. Suppose a Spanish MNC has a mirror-image situation and needs $2,900,000 to finance a capital expenditure of one of its U.S. subsidiaries. It finds that it must pay a 9 percent fixed rate in the United States for Dollars, whereas it can borrow Euros at 6 percent. The exchange rate has been forecast to be $1.33/€1.00 in one year. Set up a currency swap that will benefit each counterparty.
2. Suppose that one year after the inception of the currency swap between Centralia and the Spanish MNC, the U.S. Dollar fixed-rate has fallen from 8 to 6 percent and the Euro zone fixed-rate for Euros has fallen from 6 to 5.50 percent. In both Dollars and Euros, determine the market value of the swap if the exchange rate is $1.3343/€1.00. (10+10)
Options, Futures & Other Derivatives
(For CNM Cases)
Assignment – I
Assignment Code: 2016FM07A1 Last date of Submission: 30th April 2016
Maximum Marks: 100
Attempt all questions. All the questions are compulsory & carry equal marks.
Section-A
1. What are the most important aspects of the design of a new futures contract? Explain how margins protect investors against possibility of default?
2. Explain what is meant by a perfect hedge? Does a perfect hedge always lead to a better outcome than an imperfect hedge? Explain.
3. `What is the purpose of the convexity adjustment made to EuroDollar futures rates? Why is it necessary?
4. Suppose Morgan Guaranty, Ltd. is quoting swap rates as follows: 7.75 - 8.10 percent annually against six-month Dollar LIBOR for Dollars and 11.25 - 11.65 percent annually against six-month Dollar LIBOR for British pound sterling. At what rates will Morgan Guaranty enter into a $/£ currency swap?
Section-B
Case Study: The Centralia Corporation’s Currency Swap
The Centralia Corporation is a U.S. manufacturer of small kitchen electrical appliances. It has decided to construct a wholly owned manufacturing facility in Zaragoza, Spain, to manufacture microwave ovens for sale in the European Union. The plant is expected to cost €5,500,000, and to take about one year to complete. The plant is to be financed over its economic life of eight years. The borrowing capacity created by this capital expenditure is $2,900,000; the remainder of the plant will be equity financed. Centralia is not well known in the Spanish or international bond market; consequently, it would have to pay 7 percent per annum to borrow Euros, whereas the normal borrowing rate in the Euro zone for well-known firms of equivalent risk is 6 percent. Alternatively, Centralia can borrow Dollars in the U.S. at a rate of 8 percent.
Questions:
1. Suppose a Spanish MNC has a mirror-image situation and needs $2,900,000 to finance a capital expenditure of one of its U.S. subsidiaries. It finds that it must pay a 9 percent fixed rate in the United States for Dollars, whereas it can borrow Euros at 6 percent. The exchange rate has been forecast to be $1.33/€1.00 in one year. Set up a currency swap that will benefit each counterparty.
2. Suppose that one year after the inception of the currency swap between Centralia and the Spanish MNC, the U.S. Dollar fixed-rate has fallen from 8 to 6 percent and the Euro zone fixed-rate for Euros has fallen from 6 to 5.50 percent. In both Dollars and Euros, determine the market value of the swap if the exchange rate is $1.3343/€1.00. (10+10)
No comments:
Post a Comment