BUS 761 - Global Finan Risk Management — Sample Exam I Professor Koch Covers: Hull, Chapters 7-10. Answer all questions. Points assigned to each problem appear in parentheses. 80 points possible. () (9) ©) Given the spot exchange rate is S = 2 $/£, consider the following quotes for firms A and B: UK. £ loan U.S. $ loan U.K. Company A 11.0% 8.0% U.S. Company B 10.5% _ 1% = Difference Ost tet —> Diinne -(SEA Company A wants to borrow 20,000,000 U.S.S, while B wants to borrow 10,000,000 U.K-E. A. Given these quotes, describe the margin that could be captured in a currency SWAP. Discuss the economic reasons that this margin UK Ce better Known m UR, - is often available to be shared with a currency SWAP. qlus tax advantages in own country B. Design a currency SWAP that gives the bank 10 basis points and splits the remaining margin between Companies A and B. See next pa C. Explain (briefly) how you wouldValue a different SWAP that is the exchange ofa floating rate in one qurrency fora fixed rate in another currency. currencyAPBrfixed = Eke + Leten s Zs __ exchan currency B Be udng = Ke + Leth Vewae = SB,-By wher S= ie 2> ° A. Consider-an exchange-traded put option contract 8B to sell 100 shares with strike price X = $40. e KY Q) Q) Q) 2 2) Q) Q) @) @) () Explain how the terms of the contract will change when there is: = (i) a 10% stock dividend; 10 shares @ 40/hl = 36.36 (ii) a 10% cash dividend; none: (iii) a S-for-d stock split; [a5 shaves @ 40/LA5= 32 (iv) an announcement of increased earings. pone, B. _ Briefly discuss the margin requirements for the following investments: (@_ purchase of 100 shares of stock; can borrow up to V2.5 margin 2 02 (ii) purchase of 2 put options; —~ no margin allowed sale of a naked call; gnafer If 2 calculations; (i) writing a cover sl GH (120% of sale proceeds +25 = amenst oT) Wone vedi @liost, af sale proweeds + 15) C. Isa European option always worth at least as much as its intrinsic value? Explain. Sele Calyr > CR SKE > SK Pat-no > p2KE LT A K-F D. _ Distinguish between the function of a Floor Broker and that of the Order Book Official. 7 Gikks ie ate) Keeps limit order book’) 1Bus 761 Sample Exam ZT contiqued Galen 18.) A Gk ge RK berans lOmage {uo > = oe B bormws 20mm f _ = 2.0 TThrousl bank A lends lomnf to B, 8 lvds zomg to A. A gts Woe fe & tho {hoy Sa A pays 78% fort <7ED 78 = Bo gts 70% for fo Ge ie: B peyr 10.32 for = ey Cee es Margin on f 0.2% + O32 0.02 oe 00% COM) oan Net Margin Captred 0.24% ae oe Go-2B) Coe-07) ((0.5-103)(10) (10) (10) (Ss) Sample. Gust S76 Eke! cote Consider the following two options: Call option with strike price K, = $55; cost -- c= $2.00 Put option with strike price K; = $45; cost -- p ‘A. Suppose you buy two calls with K, = $55, and you buy one put with K;= $45. Present the payoff pattern of this combination. Be sure to discuss or show the break-even point(s). Cot S ACH TICES) PCED B, Suppose you self two calls with Ky = 335, and you self three puts with Kx = $45 Present the payoff pattem of this combination. Be sure to discuss or show the break-even point(s) Revenue = 2(+82)+ 3683) = aD) Babs Bs ae A. Suppose the current stock price is S = $28; a one-year European call option with a strike price of K = $30 costs c = $6; and the riskfree rate is 10% (thus, Ke" = $27.15). What is the equilibrium value of a one-year European put on this stock (p) with the same exercise price, implied by Put-Call Parity? St p= heres p= KeT+O—-§ = Dulhag— ay = B. If, in addition to the information in A. above, you observe that the put is currently selling for p = $6, discuss possible arbitrage opportunities. p is currently, too high sell pot for 4 buy synthetic put for Hers Chuy bond, cal, shert stock) keep the difference sy = transactions) costs