Assignment 1

EKRP321

Financial markets

Question 1

Let

𝑓𝑟 = implied forward rate

𝑟1 = spot rate for the longer term=6.35%

𝑟2 = spot rate for the shorter term=5.75%

𝑡1 = longer term= 182 days

𝑡2 = shorter term=91 days

1.1 Implied forward rate

1
(1 + 𝑟1 )𝑡1 𝑡2 −𝑡1
𝑓𝑟 = ( ) −1
(1 + 𝑟2 )𝑡2
365
182 91
(1 + 0.0675)365
𝑓𝑟 = ( 91 ) −1
(1 + 0.0575)365

𝑓𝑟 = 0.069534042
𝑓𝑟 = 6.95%

1.2

Let the maturity value be given

Future Value (FV)

Notional Value(NV)=R20000000

182-day instrument maturity value=𝐹𝑉1

𝐹𝑉1 = 𝑁𝑉(1 + 𝑟1 )𝑡1

182
𝐹𝑉1 = 20000000(1 + 0.0635)365
𝐹𝑉1 = 𝑅20623487.89
91-day instrument maturity value=𝐹𝑉2

𝐹𝑉2 = 𝑁𝑉(1 + 𝑟2 )𝑡2

91
𝐹𝑉2 = 20000000(1 + 0.0575)365
𝐹𝑉2 = 𝑅20280724.21
Question 2

Future Value Price (FVP)

All-in-price=105

Carry cost =rfr=8.5%

ftd=30 November 2022

fvd=20 September 2022

𝑐𝑑2 =December 2022

FVP=A+B-C

FVP=All in price(A)+carry cost (excluding income)(B)-income(C)

A=105
𝑟𝑓𝑟 𝑓𝑣𝑑−𝑓𝑣𝑑 8.5 71
B= 𝐴 × ( )= 105 × ( )=1.73609589
100 365 100 365

𝑐 𝑟𝑓𝑟 𝑐𝑑2 −𝑓𝑡𝑑 10.5 8.5 20

C=
2
[1 + (100 ( 365
))]=
2
[1 + (100 (365))]=5.274452055

FVP =105+1.736-5.274

=101.4616438

=101.46
Question 3

Starting variation
balance 250 000
Total variation until 21 Nove (5925)
Balance of Variation 244 075

BILMAY22 - Account
Strike Change in
Date Action Quantity price Var-Margin Balance
2022/02/10 - 0
2022/02/10 Sell -15 36022 - -15
2022/03/14 Buy 15 36465 (6645) 0

BILJUL22 - Account
Strike Change in
Date Action Quantity price Var-Margin Balance
2022/02/10 0
2022/03/12 Buy 10 36150 - 10
2022/03/16 Buy 10 36500 3500 20
2022/04/19 Sell -30 36525 500 -10
2022/06/08 Buy 10 36508 170 0

BILSEP22 - Account
Strike Change in
Date Action Quantity price Var-Margin Balance
2022/02/10 0
2022/03/27 Sell -15 36800 - -15
2022/05/27 Buy 45 36675 1870 30
2022/06/23 Sell -15 36405 (8100) 15
2022/07/09 Sell -15 36220 2775 0

Question 4
VSD/ZAR forward rate
USD ZAR
forward forward
rate rate

Int rate= 5.5% in USA over 60 days Int rate= 9% in SA over 60 days

VSA/ZAR 16.18
USD ZAR
spot spot
rate rate
 𝑑𝑎𝑦𝑠
1+𝑣𝑎𝑟𝑖𝑎𝑏𝑙𝑒 𝑐𝑢𝑟𝑟𝑒𝑛𝑐𝑦 𝑟𝑎𝑡𝑒 ×
365
forward outright rate = 𝑠𝑝𝑜𝑡 𝑟𝑎𝑡𝑒 × 𝑑𝑎𝑦𝑠
1+𝑏𝑎𝑠𝑒 𝑐𝑢𝑟𝑟𝑒𝑛𝑐𝑦 𝑖𝑛𝑡𝑒𝑟𝑒𝑠𝑡 𝑟𝑎𝑡𝑒 ×
365

60
(1 + 0.055 × )
= 16.18 × 365
60
(1 + 0.09 × )
365
= 𝑅16.08826674

Question 5

Face value(FV) =R5 million

Time to maturity =8 years
Coupon rate= 7.25% NACSA (payable half annually)
Yield to maturity =8.05% per annum

5.1 Price of the bond is the value of the bond

kd=yield to maturity
n=time to maturity
𝑖𝑛𝑡
𝑘𝑑 −2𝑛
P =∑8𝑡=1 2
𝑘 2𝑛
+ 𝑓𝑣 (1 + )
2
(1+ 𝑑 )
2

1−(1+𝑘𝑑 )−𝑛 𝑘𝑑 −2𝑛

P=𝑐 ( ) + 𝑓𝑣 (1 + )
𝑘𝑑 2

P=𝑐𝑜𝑢𝑝𝑜𝑛 × 𝑃𝑉𝐼𝐹𝐴𝑘𝑑 ,𝑛 + 𝑓𝑎𝑐𝑒 𝑣𝑎𝑙𝑢𝑒 × 𝑃𝑉𝐼𝐹𝑘𝑑

,𝑛
2 2

0.0725
C= × 5000000 =181250
2
8.05
Kd= 100 =0.0805

Kd/2=0.0805/2 =0.04025
Fv=5000000
Therefore :
1−(1+0.04025)−16
P=181250 ( ) + 5000000(1 + 0.04025)−16
0.04025

P=181250(11.63083547) +5000000(0.531858872)
P=R476738.29

5.2 Macaulay duration

Let the duration be given by
∑ 𝑝𝑟𝑒𝑠𝑒𝑛𝑡 𝑣𝑎𝑙𝑢𝑒 𝑜𝑓 𝑐𝑎𝑠ℎ𝑓𝑙𝑜𝑤×𝑡𝑖𝑚𝑒 𝑜𝑓 𝑐𝑎𝑠ℎ𝑓𝑙𝑜𝑤
D= 𝑝𝑟𝑖𝑐𝑒 𝑜𝑓 𝑏𝑜𝑛𝑑

1 𝑡×𝐶𝐹
D= 𝑃 ∑𝑛𝑡=1 (1+𝑖)𝑡𝑡

Where
𝐶𝐹𝑡 = cashflow at time t
t =time
P=Price of bond
i=yield

181250 2(181250) 3(181250) 16(181250) 16(5000000)

D= (1+0.04025)1 + (1+0.04025)2 + (1+0.04025)3 + ⋯ + (1+0.04025)16 + (1+0.04025)16

D=12.31522803 in half years

Therefore :
𝐷 12.31522803
Macaulay duration (years) = 2 = =6.157614016=6.16 years
2

5.3 Modified Duration

Let modified duration be given by
𝑀𝑎𝑐𝑎𝑢𝑙𝑎𝑦 𝑑𝑢𝑟𝑎𝑡𝑖𝑜𝑛
D* = 𝑌𝑇𝑀
1+
𝑛

6.157614016
D* = 0.0805 =5.919359785
1+
2

Modified Duration =5.92 years

5.4 The O-H one of the bond
Zero coupon bond value
𝑓𝑎𝑐𝑒 𝑣𝑎𝑙𝑢𝑒
Maturity Value= (1+𝑌𝑇𝑀)𝑛

5000000
Maturity Value=(1+0.0805)8=R2691360.25

5.5 Effect of 25 basis point increase in the interest rate

BPS=basis points=25/100=0.25
New yield to maturity = 8.05 + 0.25 =8.3%

0.0725
C= × 5000000 =181250
2
8.3
Kd=100=0.083

Kd/2=0.083/2 =0.0415
FV=5000000

Therefore:
1−(1+0.0415)−16
P=181250 ( ) + 5000000(1 + 0.0415)−16
0.0415

P=2088799+2608684.85
P=R4697484484.23
REFERENCES

1) ECS2605-J The South African Financial System

2) https://web.iit.edu/sites/web/files/departments/academic-affairs/academic-resource-
center/pdfs/macaulay_duration.pdf
3) Hull, J., Treepongkaruna, S., Colwell, D., Heaney, R. and Pitt, D., 2013. Fundamentals of
futures and options markets. Pearson Higher Education AU.
4) Jorion, P., 2010. Financial Risk Manager Handbook: FRM Part I/Part II. John Wiley & Sons.
5) Steiner, B., 2012. Mastering Financial Calculations: A step-by-step guide to the mathematics
of financial market instruments. Pearson UK.
6) Van Zyl, C., Botha, Z. and Skerritt, P. eds., 2006. Understanding South African Financial
Markets. Van Schaik Publishers.