Topic: Financial Markets with computational finance

Section A

All questions carry equal marks of 5%.

  1. What is the Non-Deliverable Forward (NDF) contract? Explain itsfeatures.
  • What are the advantages of futures comparedforwards?
  • Explain the term “in the money”. When is a call option in the money? When is a put option in themoney?
  • What are the factors that are determining the price ofoptions?
  • Assumeweconstructabullspreadbybuyingacalloptiononastockwithacertainstrike price (X1) and selling a call option with a certain strike price (X2) on the same stock. Draw its profitdiagram.
  • Explainwhythethreedefinitionsofsustainablegrowthratesaredifferent?Whichoneis actually the most sustainable, andwhy?
  • WriteafunctioncalledlemoninVBAwiththreevariablea,bandc,wherelemon=(ab

+ b) × c, and the output of the lemon must be an integer.

  • What is the global minimum variance portfolio (GMVP)? What type of investors would want to invest init?
  • Compare and contrast systematic and unsystematic risk. Is it possible to eliminate both risksentirely?
  1. Under which circumstances should you exercise an American callearly?

Section B

  1. (a)    Suppose a bank is quoting the following exchange rates: DKK 7.4551–7.4558/€1

MXN 16.5779 – 16.5784/€1

Calculate the bid-offer rates between Danish Krone (DKK) and Mexican Peso (MXN). In these bid-offer rates, Danish Krone is the base currency. (Hint: the calculation process should involve two separate transactions.)

[50%]

  • A 52-week Treasury Bill rate in the U.S. is currently 0.15%, and the exchange rate is currently US$1.6240/£1. If the U.K. investors expect that the exchange rate at the end of 52 weeks will be US$1.6321/£1, what is the expected returnin terms of pounds? Explain the law of oneprice.

[20%]

  • What are the factors that can affect foreign exchange rate in the longrun?

[30%]

  1. (a)     Calculate the duration of a bond with $1,000 par value and a 9 percent coupon rate, with five years still remaining to maturity, and a 9 percent yield to maturity.

[20%]

  • What are foreign bonds and Eurobonds? Discuss the popularity of Eurobonds over foreignbonds.

[25%]

  • Estimate the bond price of a newly issued 3-year maturity, 8% coupon bond making annual coupon payments for a yield to maturity of 4%. We assume that the bond face value is£1000.
  • What is the European debt crisis? Discuss possible solutions to thecrisis.

[25%]

[30%]

  1. Data on expected returns, standard deviations, covariances of returns and for security A, B and C are provided in the following spreadsheet. The portfolio of these three securitiesisconstructedbyinvestingwealthineachsecurityintheproportionsshownin cells B14, C14 andD14.
  • Write down the actual mathematical expressions for cells B17 and B18 withcell references (instead of the variables) to show the exact calculations of the portfolio expected return and the portfolio standard deviation of return.[15%]
  • Write down the Excel formulae for the calculation of the quantities in cellsB17 and B18 with cell references.[15%]
  • Calculate the values in cells B17 and B18.[10%]
  • What are the expected return and the standard deviation of return of a portfolio which is 50% long in security A, 25% long in security B and 25% long in security C?[10%]
  • The risk-free rate is assumed to be 0.5% per year. Calculate the Sharperatios for securities A, B, C, as well as for the portfolio constructed in question 17(d) above.[20%]
  • Comment on your answers to question 17(e) above.[30%]
  1. Data on stock price, exercise price, volatility, risk-free rate, and time to maturity that can be used to calculate the option prices are provided in the screenshot below. Use the information provided to answer questions18(a)-18(f).
  • Write down the Excel formula for cell B10.[15%]
  • Calculate the value for cell B10.[10%]
  • Write down the Excel formula that can be used to calculate the value in cellE9. [15%]
  • The value of N(d1) in cell E9 is 0.5697. Discuss the significance of this value in the context of risk management.[35%]
  • You also want to use the put-call parity to calculate the price of a put on the stock with the same exercise price and characteristics. Write down theExcel formula for cell B13.[15%]
  • Calculate the value in cell B13.[10%]

Type of service-Academic paper writing
Type of assignment-Term Paper
Subject-Finance
Pages / words-6 / 1650
Academic level-Undergraduate
Paper format-Harvard
Line spacing-Double
Language style-UK English

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