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Fin 4910/6440 Take Home Exam Spring 2008

1. r= 8%
m= 2
The rate with continuous compounding is 7.84%

2. FV = $1,200
PV = $1,000
m = 2
With semi-annual compounding the return is R where
1000 *(1+ R/2)^2 = 1200
R= 19.09%

3. r = 12%
The rate of interest is R where R
e^R = (1+.12/12)^12
R= 11.94%

4. r = 9%
m = 4
The equivalent rate of interest with quarterly compounding is R where

e^.09 = (1+R/4)^4
or R = 0.09102
The amount of interest paid each quarter is therefore;
$227.55

5 -20% 17% 15% -8% 25%

Arithmetic mean = 5.80%


Geometric mean = 4.36%

6 Day Closing price u = ln(pt/pt-1) U^2


1 25.2
2 30.1 0.177681 0.0315706
3 32.7 0.08285 0.0068641
4 29.3 -0.10979 0.0120533
5 31.5 0.0724 0.0052418
Sum 0.223144 0.0557298

The standard deviation of wekly return is


10.6971%
Assuming that there are 52 weeks in a year, the annualized volatility is
1.48%
The standard error of this estimate is 0.47%
7 spot price 0.46 0.59 -0.28 -0.31 0.61
Futures price 0.49 0.79 -0.18 -0.32 0.55

a. Covariance = 0.178396
b. Correlation coefficient = 0.97821897
c. Standard deviation of spot price = 0.46832681
d. Standard deviation of futures price = 0.48675456
e. Minimum variance hedge ratio = 0.94118516 1.01671

8 Mean 9%
Standard deviation = 3.50%

Y = (X - u)/Stdev = 0.857143
Y > .857143 = 0.1956829692 The probability of the price rising more than
12% is 0.19568297

9 Amount of dividend = $1
Price = $35.75
Rate = 10%
Time of earned dividends 3 6 9 12
0.97531 0.95122942 0.9277435 0.904837

a. Price of pre-paid forward contract = $31.99

b. Price of a forward contract = F0*EXP(rt) $35.36

10 Value of index = 450


Dividend yield = 1.25%
Risk-free rate = 5.75%
Time = 0.25

Value of futures contract = $455.09

11 June 8 futures price = $54.18 per barrel


November 10 futures price = $58.19
Hedged amount 20000
Unhedged amount 5000
Price paid = $1,382,850.00 assuming hedging 20 contracts

Amount paid $1,354,500.00 assuming hedging 25 contracts

12 Maturity Rate% per annum


1 10%
2 11.90%
3 14.20%
4 15.50%
5 17.80%

F2 = 13.80%
F3 = 18.80%
F4 = 19.40%
F5 = 27.00%

13 N= 17 (8 years + 6 months)
FV = 100
Coupon rate = 8%
Coupon payment = 4
YTM = 6%
P/Y = 2 Semi-annual payments

a. PV = $113.17
CF = 1.13166

b. N= 24
Coupon rate = 6.75%
Coupon payment = $3.38
PV = $106.35
CF = 1.06351
Bond futures contract = 119.75
c. 120.4688 135.5164 -15.0477 CTD
113.5313 127.3551 -13.8239

d. Cash price = Quoted price * CF + Accrued interest $139.41

14 Interest period = 115


Reference period = 184
Yield = 8.50%
Repo rate = 2.25%
Cash price = 109.53125

a. Dirty price = $112.19


b. Cost of funding = $0.14
c. Total cost of cash and carry = $112.33
d. Forward accrued interest = $3.12
e. Fair futures price = $109.21

15 N= 5 FV = $100.00
Yield = 11%
r= 8%
Pmt = $8.00
1 2 3 4 5
7.166673 6.4201503837 5.75139 5.15229137 62.31058

a. Price = $86.80

t * CF 7.166673 12.840300767 17.25417 20.6091655 311.5529

b. Bond's duration = 4.256 years


c. Yield decrease = 0.20%
Increase in bond price = $0.74
Increase in bond price = $87.54
d. Bond's yield = 10.800%
Bond's price = $87.54

16 Buy 5000 oz@$4.554 per oz $22,770.00


Storage cost = $100.00 per month
Insurance = $284.63 or $71.16 per quarter

If Dec spot price = $4.71


Sell 5000 oz silver @4.71 $23,525.00
Purchase Price $22,770.00
Storage costs $300.00
Insurance costs $71.16
Net profit $383.84

a. The change in the silver price 3.32%

b. Return to the investor silver market 1.69%

Buy Dec. futures


1 futures contract (Dec) @ $4.615 $23,075.00
Initial margin 1500
Assume futures price = spot price 4.705
Sell Dec. futures 5000 oz @4.705 23525
Purchase value $23,075.00
Net profit $450.00
Return to investor 1.95%