Fin 330: Sample Exam

Wisconsin School of Business

Name: ________________________________

Campus ID ______________________________

Section _________________________________

This sample exam is only meant to give you an idea about the format of
the exam. Do not try to guess the contents of the exam based on it!

Please read these instructions and then sign the bottom of this page to acknowledge that you have
read and understood the exam guidelines.

1) This is a closed-book, closed-note exam. You will need only your pens/pencils and your
calculator; all other materials must be placed beneath your seat (and remain there at all times).
2) Show your work. You must show all your work in a well-organized fashion if you wish to get full
credit. If I can’t read what you have written, it doesn’t count.
3) The formula sheet is attached to the last page of the exam. Feel free to tear it off and keep it.
4) Please do not ask for help during the exam. I will only answer questions relating to the clarity of
the question.
5) You are not allowed to talk about the contents of the exam with any students who have not taken
the exam yet.

GOOD LUCK!

I understand and agree to abide by the exam guidelines listed above.

Signature:______________________________

Date: ___XXXXXX______________________

1
Question 1 (6 points)

1) If the term structure of interest is upward sloping, which of the following statement is
true? (cross one)
a) The two-year zero rate will be lower than the one-year zero rate.
b) The two-year zero rate will be higher than the implied forward rate corresponding
to the period between one and two years in the future.
c) The two-year zero rate will be lower than the implied forward rate corresponding
to the period between one and two years in the future.
d) The two-year zero rate will be equal to the implied forward rate corresponding to
the period between one and two years in the future.

2) The term “contango” refers to the situation in which (cross one)

a) Futures price is below the expected future spot price.
b) Futures price is above the expected future spot price.
c) Futures price is equal the expected future spot price.
d) Futures price is above the current spot price.

3) When the basis strengthen unexpectedly, which of the following is true (cross one)
a) A short hedger’s position improves.
b) A short hedger’s position worsens.
c) A short hedger’s position sometimes worsens and sometimes improves.
d) A short hedger’s position stays the same.

2
Question 2 (9 points)

A company enters into a long futures contract to buy 1,000 barrels of oil for $40 per barrel.
The initial margin is $6,000 and the maintenance margin is $4,000. What is the oil futures
price that will trigger a margin call? What is the oil futures price that will allow $3,000 to be
withdrawn from the margin account?

3
Question 3 (20 points)

A bond portfolio is worth $24,000,000 and has a duration of 5.5 years. The futures price for a
treasury bond futures contract is 110 and each contract is for the delivery of bonds with a face
value of $100,000. On the delivery date the duration of the bond that is expected to be
cheapest to deliver is 12.5 years.

1) How many contracts are required for hedging this portfolio?

2) Should you go long or go short in the futures market?
3) If the short-term interest rates decrease while the long-term interest rates remain
relatively unchanged. What is the effect of this on the performance of the hedge?

4
Question 4 (15 points)

A firm entered into a forward rate agreement with a bank. The firm agreed to pay the bank a
semiannually compounded interest rate of 4% per annum on a notional deposit of $ 6 million
for a 6-month period starting in two months. The current continuously compounded two-
month and eight-month USD LIBOR rates are 2% p.a. and 2.5% p.a., respectively. What is
the value of this forward rate agreement to the firm?

5
Question 5 (20 points)

The following information is given:

June 15, 2008 December 15, 2008

Spot rate (USD/EUR) 1.5250 1.2570
USD interest rate 3% p.a. 2% p.a.
EUR interest rate 3.5% p.a. 2.5% p.a.

On June 15, 2008, a US firm entered into a forward contract. The contract allowed the firm to
sell 2 million Euros in 12 months (i.e., on June 15, 2009) at the no-arbitrage forward
exchange rate prevailing on June 15, 2008. What was the value of this contract to the firm on
December l5, 2008? Assume all the interest rates are continuously compounded and the zero
curve is flat.

6
Question 6 (15 points)

Suppose that the standard deviation of monthly changes in the price of commodity A is 0.3.
The standard deviation of monthly changes in the price of a futures contract on commodity B
(which is similar to commodity A) is 0.2. The correlation between the futures price and the
commodity price is 0.9.
1) What hedge ratio should be used when hedging a one month exposure to the price of
commodity A?
2) Suppose you are a producer of commodity A and expect to produce 1 million units of this
commodity in one month. Each futures contract represents 42,000 units of commodity B.
How many futures contracts should you long or short in order to hedge the risk?

7
Question 7 (15 points)

Consider the following two bonds. All interest rates are expressed as continuously
compounded rates, and all coupons are paid semi-annually. The face value of both bonds is
$1000.

Maturities (years) Annual Coupon Rate Price of Bond ($)

0.5 0 967.20
1 5% 971.35

a) What is the one-year zero-coupon rate?

b) What is the one-year par yield for bonds with semiannual coupon payments?