JUCIA WANTA SIANIPAR

023143011

Due Date: May 25, 2017

Submission: Via email to fhputra1@gmail.com or assignment drop box via Google

Drive

Problem A Bond Valuation

Blake Corp., a pharmaceutical company based in Louisville, KY, issued bonds to

fund their expansions. You are an investor who is interested to invest in Blake
Corp.’s bonds. The bond’s par value is $1,000 with coupon rate at 5%, yield to
maturity at 6% and matures in 10 years.

Question:
1. If the bond pays annually, how much is the bond price?
2. If the bond pays semi-annually, how much is the bond price?
3. Is this a premium or discount bond?

Answer

 Par Value x Coupon Rate

$ 1000 x 5% = $50

Annually
Po = $50 x ( ( )
)

 Semi annually ( )

Semi-annually

PO = [ ( )
]

Based On both of calculation see the price at the trade now are discount bond. Because
the trade result less than < $ 1000

Problem B / Commodities Futures

Coco Jewelers will need 100 ounces of gold to manufacture their jewelries next year.
Today, at X1, gold spot price is US$ 1,250 per ounce. Coco’s CFO predicts that gold
price will increase one year from now. The CFO then seek for a futures contract at an
exchange for $1,300 per ounce of gold to be delivered next year at X2.
Question:

1. What happens if gold price at X2 is US$1,200 per ounce? Show your work!

Answer :
If gold price is USD 1200 per ounce, Coco Jewelers will assume loss of USD 100 / ounce
(USD1200 – USD 1300) by entering into this contract. Meanwhile, Coco Jewelers will
assume loss of USD 10,000 for 100 ounces of gold (USD 100 x 100 ounces) and the
counterparty will assume gain of USD 10,000 for 100ounces of gold.

2. What happens if gold price at X2 is US$1,300 per ounce? Show your work!

Answer :
If gold price is USD 1400 per ounce, Coco Jewelers will assume gain of USD 100 / ounce
(USD 1400 – USD 1300) by entering into this contract Meanwhile, Coco Jewelers will
assume gain of USD 10,000 for 100 ounces of gold (USD 100 x 100 ounces) and the
counterparty will assume loss of USD 10,000 for 100ounces of gold.

3. What happens if gold price at X2 equals to the futures contract price?

Answer:
If the Price of gold equals to future contract price, the parties is break event point.
Because both the parties got not gain/loss.

Problem C / Currency Futures

In January 1 X1 Betsy’s Corp., a Canadian cosmetics company based in Winnipeg,

exports US$100,000 worth of lipstick to Saphero, a cosmetics specialty store based in
Boston. The payment will be made in full amount one year from now in January 1 X2.
Because Betsy’s reports its earnings in Canadian Dollars, the finance manager
concerns about the exchange rate risks against the US Dollars. The finance managers
then did his research in at futures exchanges and figured out that:

USD Spot:
US$1 = CA$ 1.10
CA$ Spot: CA$ 1.10 = US$ 0.9090
CA$ interest rate is at 2.5%, while US$ interest rate is at 1%

Question:

 Under Interest Rate Parity (IRP) theory, find the optimum price of this futures
contract? Show your work!
Answer :

IRP at n+1 = USD 1 * (1+1%) = CAD 1,1 (1+2.5%)

IRP at n+1 = USD 1,01 = CAD 1,1275
USD $ 1 = CAD 1,1163

So, Because of Betsy’s Co,- exports USD $ 100.000 in control, the company must
 SELL at CAD 1,1163/usd

 What happens if the spot price at X2 is higher/lower than the contract price?
Explain!
Answer

a) If the spot price at X2 is < the spot price at X1, the exporter will be gained by
anticipating the appreciation of the CA.
b) If the spot price at X2 is higher than spot price at X1, the exporter will loss.

Problem D / Options

Eli Lilly (LLY) is a pharmaceutical company based in Indianapolis, IN. LLY’s stock is
trading at $50/share and Jeremy, a finance student at Harvard, is interested to buy
100 shares of LLY next year when he graduates from Harvard and receive his
$10,000 graduation gift from his grandfather. Jeremy forecasted that LLY’s stock
price would eventually increase, hence decides to buy $3 call options to buy LLY
stock at $50 strike price. Exercise date is one year from now.

Question:
1. If LLY price at exercise date is $55/share, what happens to Jeremy’s call
options?

Answer:
Assumption, If Jeremy will be buy share of LLY at strike $ 50, and then sell the share
to market price at $ 55/share. So, Jeremy must pay $ 3/call option per-share, thus
the profit is $ 2. In these case we can say “Called in the money “ . And jeremy’s got
profit ($ 2 * 100share) = $ 200.

2. If LLY price at exercise date is $45/ share, what happens to Jeremy’s call
options?

Answer:
Assumption, If Jeremy will be buy share of LLY at strike $ 50, and then sell the share
to market price at $ 55/share. Jeremy Will be Losses $ 8/share, and Jeremy
cancelled by his call options. This is “called out the money”.

3. If LLY price at exercise date is $53/share. what happens to Jeremy’s call

options?

Answer :
If Jeremy will be buy share of LLY at strike $ 50, and then sell the share to market
price at $ 53/share. Jeremy will let the “call option to expire out and lost 100%” of her
$300 options from the premium ($3 x 100 shares).

Extra Credit for Problem D:

Suppose Jeremy decided to buy the call options and 100 shares of LLY stocks. How
much money does Jeremy has left to put in his savings account?

Answer :

Jeremy Buy share of LLY $100 at the strike $ 50/ strike share. ($50 * 100 share = $
5000) + Premium ( $ 3 call option * 100 share = $ 300).
So, The graduation gift jeremy’s got $ 10.000 from his father. And Now, Jeremy
Have money ($ 10.000 - $ 5.000 - $ 300) = $ 4.700.
Now, Jeremy have money $ 4.700.