Ali Izaan

1001748265

Q1) There are many types of risk including diversifiable and undiversifiable risks. Market risk is changes
in an asset’s price due to changes in market condition either through market forces or human behavior.
We can reduce this type of risk by hedging which is a type of investment strategy which protects from
losses. Interest rate risk refers to changes in asset values due to changes in nominal interest rates
whereas as exchange rate risk refers to changes in investment income due to exchange rate fluctuation.
Credit risk refers to changes in financial integrity and its ability to deliver on its commitment. All these
types of risk can be reduced by using interest rates swap or swap financial derivative. Inflation risk
refers to loss of purchasing power from inflationary measures. It can be mitigated by using call/put
option strategy.

Q2) (0.92-0.93)x100000 = € -1000 (loss)

Q3a) $250-$279=-$29(loss) per oz

b) $250-$279= -$29(loss) per oz

c) $250-$279= -$29(loss) per oz

d) ‘C’ has the most attractive price scenario. It is due to the reason that we must mark to profit of
market to lend money to borrowers.

Q4)a) We have to short 28 contracts.

2800000(1.6-1.2) = 28

800x 50

b) i) SIF is overvalued (762>752.08)

F3= S0(1 + rf – d)^3/12= 747 (1 + 0.045 – 0.0175)^3/12 = 752.08

ii) Short SIF, long spot, borrow at rf to finance purchase of spot and receive and reinvest dividends.
Therefore sell at 762 and buy at 747.