You are on page 1of 6

PART B

SOLUTIONS..........

Family Name:......

Other Names:........................................................................
Student Number:..................................................................

Part 1
21
22
23
24

/50
/12.5
/12.5
/12.5
/12.5

Total

MURDOCH BUSINESS SCHOOL


BUS325 DERIVATIVE SECURITIES
MID-SEMESTER TEST
JUNE 2012

Time Allowed:

One and one half hours.

Aids Allowed:

To be supplied by Candidate:
Attached to this paper:

Format:

This paper has two parts. Part A contains 20 multiple choice


questions worth a total of 50 marks, and Part B contains 4
questions worth 12.5 marks each. Answer Part A on the
answer sheet, and Part B on the question paper in the space
provided. Show all calculations for Part B.

Calculator
Formula Sheet

Part B Answer these questions on the question paper in the space provided.
21.

The cash price of a $1,000 bond that paid coupons semi-annually with a coupon rate of 7%
p.a. that matures in exactly 18 months is $1,017.34.
The continuously compounded zero rates are as follows:
Maturity (months)
6
12
18
24

Rate (% p.a.)
5.3
5.5
?
5.9

What is the missing zero (spot) rate?


[12.5 marks]

P = C1 .e r1 .t1 + C 2 .e r2 .t 2 + (C3 + FV ).e r3 .t3


1,017.34 = 35.e 0.0530.5 + 35.e 0.0551 + (1,000 + 35).e r3 1.5
1,017.34 = 35 (0.9738 + 0.9465) + 1035 e r3 1.5
e r3 1.5 = (1,017.34 67.21) / 1035
r3 1.5 = ln(0.918)
r3 = 0.057

=> the eighteen-month spot rate is 5.7% p.a.

22.

On June 1, the treasurer of a US firm decides to hedge the planned issue of corporate bonds
against further interest rate increases. On current forward interest rates, the August bond
issue would realise $1.89 million. The bonds would have a total face value of $2.0 million
and a duration of 6.6 years. The September Treasury bond futures price is currently 94-08
and the cheapest-to-deliver bond will have a duration of 8.7 years at maturity. How should
the treasurer hedge against changes in interest rates over the next two months?
[Note: T-bond futures have $100,000 face value.]
[12.5 marks]

N=

VS DS
V F DF

1,890,000 6.6
94,250 8.7
= 15.2

i.e. SHORT 15 December contracts.

23.

Assume the only carrying cost associated with gold is the interest rate, which remains
unchanged at 10% p.a. (continuous compounded) for all maturities. Suppose that on
March 16th 2012, Jill had entered into a one-year short forward contract to sell 100
ounces of gold for USD1,700.00/oz. If three months later (June 16th, 2012), she
observed that the spot price of gold was USD1,838.00/oz, what would be the value of
her position on this date?
[12.5 marks]

f = ( K F0 )e rT

F0 = S 0 e rT

and

hence
f = K .e rT S 0
= 1700.e 0.10.75 1838
= $260.84
Since Jill had a short position, she has made a loss.
(Loss)

24.

The five-month S&P500 share price index (SPI) futures price is 1,400 points. If the
continuously compounded dividend yield on the SPI is 3.0% p.a. and the risk-free rate of
interest is 1.3% p.a. with continuous compounding for all maturities, what will be the noarbitrage value of the two-month index futures contract?
[12.5 marks]

F =Fe
2 1

(r q)(T2 T1 )
( 0.013 0.030)).( 5 2 )
12 12

1400 = F .e
1
1400 = F .e 0.0170.25
1
F = 1406
1

______________________________________________
END OF PAPER

10

Formulae you may require:

F0 = S 0 e ( r q )T

F0 = S 0 e ( c y )T

F2 = F1e

( r q )(T2 T1 )

f = ( K F0 )e rT

F0 = S 0 e ( rh rf ) T
RC = m ln(1 +

Rm
)
m

P = C1 .e r1 .t1 + C 2 .e r2 .t2 + C3 .e r3 .t3 + ... + (C n + FV ).e rn .tn

Rt ,t + n =

Rt + n .Tt + n Rt .Tt
Tt + n Tt

Cash Price = 100

h=

N=

n
Discount Rate
360

S
=
F

VS DS
V F DF

N =

VS
VF

ci e yti
D = ti

B
i =1
n

B
= Dy
B
________________________________

11