FCA Test 2 HW Questions With Verified Answers

FCA Test 2 HW Questions With Verified Answers 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? - answerBoth 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: - answerγ0=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: - answerγ60/365=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: - answerV200/365(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: - answerfall 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: - answerBuy Swiss francs forward. ii. The no-arbitrage forward price at which the importer would enter into the 60-day forward contract is closest to: - answerF0(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: - answerF20/365,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(60/365)=(Ft,PC/ BC−F0,PC/BC)/(1+rPC)T−tV20/365(60/365)=(1.7834−1.755)/(1+0.05)60/365−20/365=0.0282 GBP/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: - answerV0(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% i. The FRA that the investment manager has most likely committed to is a: - answerFRAs are quoted as "x × y"; "x" represents the number of months until the FRA expires, and "y" equals the number of months until the hypothetical loan matures, starting from the date of inception of the FRA. This manager has likely committeed to a 2 × 7 FRA. ii.