Risk and Profit

Midterm test, WS 2012/2013

1a). General concept of arbitrage, why we can assume it does not exist? (odpovědi viz. prezentace)
1b). Contango, Normal backwardation

2). A CZK-based company will need to buy 10 mil. USD in 1 year, wants to hedge against downside risk, but keep the upside potential from exchange rate movements. 1Y CZK/USD rate is 19, premium for at-the-money option is 0.5 CZK per 1 USD.
a). Propose an appropriate strategy
b). Analyze the situation (net price per 1 USD) for spot rate: 16, 20, 22.

3). 90-day rate is 0.5%, 270-day rate is 1.5%.
a). what are the rates in continuous compounding?
b). 3x9 forward interest rate (in continuous and money market compounding)
c). A company will need to deposit 10 mil. EUR in 3 month for 180 days and would like to fix interest rate. Design appropriate steps with FRA (price is given in b) – tzn. FRA 3x9.

4). November 5, 2012 – investor has 50 00 shares, market price of each is 76$. The investor is interested in hedging against market movements for next 3 months. Use March 2013 E-mini S&P 500 futures contract, index is at 1401 and one contract is for delivery of 50$ times the index. Beta of the stock is 1.4. What strategy would you advice? (Vypočítat hedge) Is there any residual risk?

5). A US company enters into 12 months forward contract to buy 1 mil. EUR for 1.4$ per 1 EUR. Three month later EUR/USD is 1.25. Count the MV of the 9-month OTC contract, knowing USD interest rate is 0.5% p.a. and EUR interest rate is 1.5% p.a. (all in continuous compounding).

Řešení: MV = (F0 – Rm)*e^-rusd*t
        MV = (F0 – 1.4)*e^-0,005*3/4
        F0 = 1.25*e^-0.015*3/4 = 1.241 => MV = (1.241 – 1.4)*e^-0,005*3/4 = -158 800 USD.