FCA Test 2 HW
Consider the following statements:
Statement 1: FRAs are typically settled in arrears.
Statement 2: Interest rate swaps and interest rate options are typically advanced
set, advanced settled.
Which of the following is most likely? - CORRECT ANSWER-Both statements are
incorrect.
An investor owns a dividend-paying stock currently worth $100. He plans to sell it
in 200 days. In order to avoid the price uncertainty, he takes a short position on a
forward contract on the stock that expires in 200 days. The stock is expected to
pay three dividends of $1 each in 30, 80, and 150 days. The risk-free rate of
return is 6%.
i.
The no-arbitrage forward price for the contract today is closest to: - CORRECT
ANSWER-γ0=1/(1.06)30/365+1/(1.06)80/365+1/(1.06)150/365=$2.96
Fo(200/365)=(100−2.96)×(1.06)200/365=$100.19
ii.
Assuming that 60 days into the forward contract the stock price is actually $105,
the value of the investor's position is closest to a: - CORRECT
ANSWER-γ60/365=1/(1.06)20/365+1/(1.06)90/365=$1.98
F60/365(200/365)=(105−1.98)(1+0.06)200/365−60/365=$105.3483
Vt(T)=PVt,T[Ft(T)−F0(T)]
V60/365(200/365)=($105.3483−$100.19)/(1+0.06)(200/365−60/365)=−$5.04
Given that the stock price rises to $110 at maturity, the value of the investor's
position at contract expiration is closest to: - CORRECT
ANSWER-V200/365(200/365)=110−100.19=$9.81
The investor is short, so the value to investor is negative $9.81.
Susan Parker goes long on a forward contract on shares of XYZ Ltd on January
1, 2016. The contract expires on June 30, 2016. On May 21, XYZ announces a
dividend of $1.00 per share, which will be paid within 1 month. Given that this
, announcement does not affect the value of XYZ stock, the value of Susan's
forward contract will most likely: - CORRECT ANSWER-fall
A U.K.-based importer of goods from Switzerland expects the value of the Swiss
franc to increase against the pound over the next 60 days. The importer will be
making payment on the shipment of imported goods in 60 days and wants to
hedge his currency exposure. The U.K. risk-free rate is 5% and the Swiss
risk-free rate is 3.2%. These rates are expected to stay the same over the next 4
months. The current spot rate is 1.75 GBP/CHF.
i.
The U.K.-based importer will most likely: - CORRECT ANSWER-Buy Swiss
francs forward.
ii.
The no-arbitrage forward price at which the importer would enter into the 60-day
forward contract is closest to: - CORRECT
ANSWER-F0(T)=[1.75(1.032)60/365](1.05)60/365=1.755
iii.
Twenty days into the contract, the spot rate is 1.78 GBP/CHF and the interest
rates have remained unchanged. The value of the forward contract is closest to: -
CORRECT ANSWER-F20/365,PC/BC=S20,PC/BC(1+rBC)T×(1+rPC)
TF20/365,PC/BC=1.78×(1.05/1.032)60/365−20/365=GBP1.7834/CHFV20/365(6
0/365)=(Ft,PC/BC−F0,PC/BC)/(1+rPC)T−tV20/365(60/365)=(1.7834−1.755)/(1+0
.05)60/365−20/365=0.0282GBP/CHF
iv.
If, at expiration of the forward contract, the spot rate is actually 1.73 GBP/CHF,
the value of the forward contract to the importer is closest to: - CORRECT
ANSWER-V0(T)=1.73−1.755=−0.025
An investment manager wants to hedge against a possible decline in interest
rates. She therefore plans to take a short position on an FRA that expires in 60
days, based on a 150-day Euribor. The current term structure for Euribor is as
follows:
Term (Days)Euribor (%)60 days6%210 days7.25%
Consider the following statements:
Statement 1: FRAs are typically settled in arrears.
Statement 2: Interest rate swaps and interest rate options are typically advanced
set, advanced settled.
Which of the following is most likely? - CORRECT ANSWER-Both statements are
incorrect.
An investor owns a dividend-paying stock currently worth $100. He plans to sell it
in 200 days. In order to avoid the price uncertainty, he takes a short position on a
forward contract on the stock that expires in 200 days. The stock is expected to
pay three dividends of $1 each in 30, 80, and 150 days. The risk-free rate of
return is 6%.
i.
The no-arbitrage forward price for the contract today is closest to: - CORRECT
ANSWER-γ0=1/(1.06)30/365+1/(1.06)80/365+1/(1.06)150/365=$2.96
Fo(200/365)=(100−2.96)×(1.06)200/365=$100.19
ii.
Assuming that 60 days into the forward contract the stock price is actually $105,
the value of the investor's position is closest to a: - CORRECT
ANSWER-γ60/365=1/(1.06)20/365+1/(1.06)90/365=$1.98
F60/365(200/365)=(105−1.98)(1+0.06)200/365−60/365=$105.3483
Vt(T)=PVt,T[Ft(T)−F0(T)]
V60/365(200/365)=($105.3483−$100.19)/(1+0.06)(200/365−60/365)=−$5.04
Given that the stock price rises to $110 at maturity, the value of the investor's
position at contract expiration is closest to: - CORRECT
ANSWER-V200/365(200/365)=110−100.19=$9.81
The investor is short, so the value to investor is negative $9.81.
Susan Parker goes long on a forward contract on shares of XYZ Ltd on January
1, 2016. The contract expires on June 30, 2016. On May 21, XYZ announces a
dividend of $1.00 per share, which will be paid within 1 month. Given that this
, announcement does not affect the value of XYZ stock, the value of Susan's
forward contract will most likely: - CORRECT ANSWER-fall
A U.K.-based importer of goods from Switzerland expects the value of the Swiss
franc to increase against the pound over the next 60 days. The importer will be
making payment on the shipment of imported goods in 60 days and wants to
hedge his currency exposure. The U.K. risk-free rate is 5% and the Swiss
risk-free rate is 3.2%. These rates are expected to stay the same over the next 4
months. The current spot rate is 1.75 GBP/CHF.
i.
The U.K.-based importer will most likely: - CORRECT ANSWER-Buy Swiss
francs forward.
ii.
The no-arbitrage forward price at which the importer would enter into the 60-day
forward contract is closest to: - CORRECT
ANSWER-F0(T)=[1.75(1.032)60/365](1.05)60/365=1.755
iii.
Twenty days into the contract, the spot rate is 1.78 GBP/CHF and the interest
rates have remained unchanged. The value of the forward contract is closest to: -
CORRECT ANSWER-F20/365,PC/BC=S20,PC/BC(1+rBC)T×(1+rPC)
TF20/365,PC/BC=1.78×(1.05/1.032)60/365−20/365=GBP1.7834/CHFV20/365(6
0/365)=(Ft,PC/BC−F0,PC/BC)/(1+rPC)T−tV20/365(60/365)=(1.7834−1.755)/(1+0
.05)60/365−20/365=0.0282GBP/CHF
iv.
If, at expiration of the forward contract, the spot rate is actually 1.73 GBP/CHF,
the value of the forward contract to the importer is closest to: - CORRECT
ANSWER-V0(T)=1.73−1.755=−0.025
An investment manager wants to hedge against a possible decline in interest
rates. She therefore plans to take a short position on an FRA that expires in 60
days, based on a 150-day Euribor. The current term structure for Euribor is as
follows:
Term (Days)Euribor (%)60 days6%210 days7.25%
