Download presentation

Presentation is loading. Please wait.

1
**Exam FM/2 Review Forwards, futures, & swaps**

2
**Four ways to purchase a stock**

Outright purchase Receive now Pay now: Borrow to pay for the stock Pay later: Prepaid forward contract Receive in future Forward contract Pay in future:

3
Notes Cost of carry Difference between interest and dividend rates Cost for you to borrow and buy stock, then hold it Implied repo rate- interest rate used to find forward price Cash and Carry Short a forward contract and buy the asset Pays off if forward price is too high

4
Futures contracts Simply a standardized forward contract, sold in exchanges Marked-to-market Changes in value are settled daily through parties Parties maintain margin accounts to cover these changes

5
**Swaps Simply a series of forward contracts Payment Types**

Prepaid- pay now Postpaid- pay at end Level annual payments- most common Types Commodity, eg. price of corn Interest rate Foreign currency Any of these could be deferred, or start in the future

6
Problem 1 The current price of a stock is $84. A one-year forward contract is entered into. It is expected that 4 quarterly dividends of $5 each will be paid on the stock starting 3 months from now. The 4th dividend will be paid one day before expiration of the forward contract. The risk-free interest rate is 6% compounded quarterly. What is the price of a prepaid forward contract? ASM p.612 Answer: $64.73

7
Problem 2 A stock index pays dividends continuously at a constant rate of 5% per annum. The current price of one unit of the index is $50. What is the price of a prepaid forward contract for delivery of one of the index in 3 months? ASM p.612 Answer: $49.38

8
Problem 3 A stock has a current price of $65. A dividend of $3.25 is expected to be paid in 6 months. The risk-free interest rate is 10% effective per annum. X is the forward price of a one-year forward contact that has the stock as the underlying asset. Determine X. ASM p.612 Answer: $68.09

9
Problem 4 Suppose a stock index is currently priced at $1,500, and the 12-month forward price on that index is $1,550. Let the annualized dividend yield on the index be 2%, and let the continuously compounded annual rate of (risk-free) interest be 8%. What would the profit or loss at forward maturity (12 months from now) under a cash-and-carry strategy? ASM p.613 Answer: $42.75 loss

10
Problem 5 Take these forward prices for forward contracts of Stock ABC: Years to Exp. Forward Price 1 $ Take these spot rates of interest: Term to maturity Spot Rate % X is the level swap price under a 3-year swap contract with the same underlying asset. Determine X. ASM p.630 Answer: $109.56

11
Problem 6 Two interest rate forward contracts are available for interest payments due 1 and 2 years from now. The forward interest rates in these contracts are based on a one-year spot rate of 5% and a 2-year spot rate of 5.5%. X is the level swap interest rate in a 2-year interest rate swap contract that is equivalent to the two forward contracts. Determine X. ASM p.630 Answer: 5.49%

Similar presentations

OK

Intermediate Investments F3031 Spot Futures Parity How to value a futures contract (REVIEW) –Create two portfolios. In the first, buy the asset and then.

Intermediate Investments F3031 Spot Futures Parity How to value a futures contract (REVIEW) –Create two portfolios. In the first, buy the asset and then.

© 2017 SlidePlayer.com Inc.

All rights reserved.

Ads by Google

Ppt on regional trade agreements and wto Ppt on do's and don'ts of group discussion strategies Ppt on input and output devices of computer download Ppt on beer lambert law example Ppt on polynomials in maths games Ppt on construction of building Ppt on shell scripting definition Ppt on turbo c compiler Ppt on bmc remedy help Ppt on couplets by alexander pope