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CCPS - BT C2-3

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PRACTICE QUESTIONS [FINANCIAL DERIVATIVES ]

Chapter 1: Introduction to Derivatives

1. An investor receives $1,100 in one year in return for an investment of $1,000 now.
Calculate the percentage return per annum with:
(a) Annual compounding
(b) Semiannual compounding
(c) Monthly compounding
(d) Continuous compounding.
2. Suppose that zero interest rates with continuous compounding are as follows:

Maturity Rate
(months) (% per annum)

3 6.0
6 6.2
9 6.3
12 6.5
15 6.7
18 7.0

- Calculate forward interest rates for the second, third, fourth, fifth, and sixth quarters.
- The investor intends to invest 1000 USD at the end of month 3. How much will he received
after 1 year ?
3. A deposit account pays 12% per annum with continuous compounding, but interest is
actually paid quarterly. How much interest will be paid each quarter on a $10,000 deposit ?
4. Suppose that 6-month, 12-month, 18-month, 24-month, and 30-month zero rates are,
PRACTICE QUESTIONS [FINANCIAL DERIVATIVES ]

respectively, 4%, 4.2%, 4.4%, 4.6%, and 4.8% per annum, with continuous compound-ing.
Estimate the cash price of a bond with a face value of 100 that will mature in30 months and
pays a coupon of 4% per annum semiannually.
5. You would like to speculate on a rise in the price of a certain stock. The current stock
price is $29 and a 3-month call with a strike price of $30 costs $2.90. You have $5,800 to
invest. Identify two alternative investment strategies, one in the stock and the other in
an option on the stock. What are the potential gains and losses from each if the stock price
increase to a) $36 per stock and b) decreases to $27 per stock at the end of 3 months ?
6. You have $5200 to invest and you would like to speculate on a rise in the price of a certain
stock. The current stock price is $52; the futures stock price is $55, each futures contract is
for the purchase of 50 stocks, initial margin for each futures contract is $20. A 3 month call
with a strike price of $55,5 costs $4. Each option is for the purchase of 50 stocks.
1. Identify alternative investment strategies
2. What are the potential gains and losses from each strategy if the stock price at
the end of 3 months increases to a) $60 per stock and b) decreases to $52 per stock
3. Which strategies will you choose ?
7. Trung Nguyen coffee company expects to receive 2 million USD for exporting coffee to
US in the next three month. The three month forward rate is 22.000 VND/USD. A 3 month
put option to sell USD with a strike price of 23.500 costs 200.000 VND. One option is to sell
100 USD.
1. What risks is Trung Nguyen exposed to ?
2. What strategies the company could do to hedge the risks ? What are the potential
outcomes from each strategy if the 3 month exchange rate is: (a) 25.000 or (b) 20.000
3. Instruct the company what they should do to hedge the risks
PRACTICE QUESTIONS [FINANCIAL DERIVATIVES ]

Chapter 2: Futures
1. Suppose that you enter into a 6-month forward contract on a non-dividend-paying stock
when the stock price is $30 and the risk-free interest rate (with continuous compounding) is
12% per annum. What is the forward price ?
2. A 1-year long forward contract on a non-dividend-paying stock is entered into when the
stock price is $40 and the risk-free rate of interest is 10% per annum with continuous
compounding.
a) What are the forward price and the initial value of the forward contract ?
b) Six months later, the price of the stock is $45 and the risk-free interest rate is still
10%. What are the forward price and the value of the forward contract ?
3. A stock index currently stands at 350. The risk-free interest rate is 8% per annum (with
continuous compounding) and the dividend yield on the index is 4% per annum. What
should the forward price for a 4-month contract be ?
4. The risk-free rate of interest is 7% per annum with continuous compounding, and the
dividend yield on a stock index is 3.2% per annum. The current value of the index is 150.
What is the 6-month forward price ?
5. The spot price of silver is $15 per ounce. The storage costs are $0.24 per ounce per year
payable quarterly in advance. Assuming that interest rates are 10% per annum for all
maturities, calculate the futures price of silver for delivery in 9 months.
6. The 2-month interest rates in Switzerland and the United States are, respectively, 2% and
5% per annum with continuous compounding. The spot price of the Swiss franc is $0.8000.
The futures price for a contract deliverable in 2 months is $0.8100. What arbitrage
opportunities does this create ?
7. A stock is expected to pay a dividend of $1 per share in 2 months and in 5 months. The
stock price is $50, and the risk-free rate of interest is 8% per annum with continuous
compounding for all maturities. An investor has just taken a short position in a 6-month
forward contract on the stock.
PRACTICE QUESTIONS [FINANCIAL DERIVATIVES ]

a) What are the forward price and the initial value of the forward contract ?
b) Three months later, the price of the stock is $48 and the risk-free rate of interest is
still 8% per annum. What are the forward price and the value of the short position in the
forward contract ?
8. A 6-month long forward contract on $1000 is entered into when the exchange rate is
20.000VND/USD and the risk-free rate of interest is 6% per annum in Vietnam and 3% per
annum in US with continuous compounding. Assume tha t the risk-free interest rate is
constant.
a) What are the 6 month forward price ?
b) Three months later, the exchange rate is 22.000VND/USD. What are the value of
the forward contract ?
9. A 9-month short forward contract on $1000 is entered into when the exchange rate is
19.000VND/USD and the risk-free rate of interest is 7% per annum in Vietnam and 4% per
annum in US with continuous compounding. Assume that the risk-free interest rates are
constant.
a) What are the 9 month forward price ?
b) Three months later, the exchange rate is 21.000VND/USD. What are the value of
the forward contract ?
PRACTICE QUESTIONS [FINANCIAL DERIVATIVES ]

Chapter 3: FUTURES
1. Suppose that you enter into a short futures contract to sell July silver for $17.20 per ounce.
The size of the contract is 5,000 ounces. The initial margin is $4,000, and the maintenance
margin is $3,000.
- What change in the futures price will lead to a margin call ?
- What happens if you do not meet the margin call ?
2. A trader buys two July futures contracts on orange juice. Each contract is for the delivery
of 15,000 pounds. The current futures price is 160 cents per pound, the initial margin is
$6,000 per contract, and the maintenance margin is $4,500 per contract.
- What price change would lead to a margin call ?
- Under what circumstances could $2,000 be with-drawn from the margin account ?
3. A company enters into a short futures contract to sell 5,000 bushels of wheat for 450 cents
per bushel. The initial margin is $3,000 and the maintenance margin is $2,000.
- What price change would lead to a margin call ?
- Under what circumstances could $1,500 be with-drawn from the margin account ?
4. The risk-free rate of interest is 7% per annum with continuous compounding, and the
dividend yield on a stock index is 3.2% per annum. The current value of the index is 150.
- What is the 6-month futures price ?
5. The spot price of silver is $15 per ounce. The storage costs are $0.24 per ounce per year
payable quarterly in advance. Assuming that interest rates are 10% per annum for all
maturities, calculate the futures price of silver for delivery in 9 months
6. An index is 1,200. The three-month risk-free rate is 3% per annum and the dividend yield
over the next three months is 1.2% per annum. The six-month risk-free rate is 3.5% per
annum and the dividend yield over the next six months is 1% per annum. Estimate the
futures price of the index for three-month and six-month contracts. All interest rates and
dividend yields are continuously compounded.
PRACTICE QUESTIONS [FINANCIAL DERIVATIVES ]

7. A short contract on 1 million kilogram copper is signed on 01/01/20X0, the agreed price is
the market price on 01/06/20X0. The current copper price on 01/01/20X0 is $10/kg, the June
futures copper price is $9/kg (each futures contract is for the purchase of 1000 kg)
- What could the copper producer do to hedge the risk ?
- What is the income of the copper producer in the 2 following strategies and compare
with his income if he doesn’t hedge the risk with futures ?
a) The copper price on 01/06 is $7,50/kg
b) The copper price on 01/06 is $10,50/kg
8. Vinacafe needs 100,000 pound of coffee on 01/09/20X0. The current coffee price on
01/06 is $20/pound. The September futures coffee price is $18/pound (each futures contract
is for the purchase of 25,000 pound.
- What could VINACAFE do to hedge the risk ?
- What is the cost of VINACAFE in the 2 following strategies and compare with his
income if he doesn’t hedge the risk with futures ?
a) The coffee price on 01/09 is $19,50/pound
b) The coffee price on 01/09 is $17/pound
9. On July 1, an investor holds 50,000 shares of a certain stock. The market price is $30 per
share. The investor is interested in hedging against movements in the market over the next
month and decides to use the September Mini S&P 500 futures contract. The index futures
price is currently 1,500 and one contract is for delivery of $50 times the index. The beta of
the stock is 1.3.
- What strategy should the investor follow ?
- Under what circum-stances will it be profitable ?

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