Assignment: Practice Questions

Subject: OFD

Marks: 20

Mode of Submission: Hard Copy (hand written)

Deadline: 9th October, 2023

(1)Assume that the company A has the portfolio size 200 crore and the company B has the
portfolio size 400 crore. Semi-annual volatility of the firms A and B are 18% and 24% per six
month respectively. Thus managers of the both the firms are interested in computing following
VaR matrix for one month. It is also observed that both the firms are mutually contrarian and
exhibit the correlation coefficient of -0.6. Thus it is highly likely that fund managers putting both
the firms in the similar basket may achieve diversification. Substantiate this with calculated
value of diversification benefits at fund managers’ level. Later the fund manager has realized that
he has committed mistake because the firm A and firm B are linearly related returns. Then
calculate the new VaR of entire portfolio caterus paribus. (Confidence interval: 95%)

(2) A cattle grower is expected to have 1200 pounds of live cattle ready to sell in three months.
The live cattle futures contract traded by the CME Group is for the delivery of 400 pounds of
cattle.

Today future price of the contract = $200 per pound

Initial margin of the contract $ 8000 per contract

Maintenance margin of the contract $10000

The expected future price of next 10 days is given below.

Date Future Price

Day1 202
Day2 203
Day 3 204
Day4 205
Day5 204
Day6 202
Day7 210
Day8 212
Day9 216
Day10 220
What is the breakeven future price for margin call?

At what future price the cattle grower can withdraw $10000 from margin account.

(3) It is July 16. A company has a portfolio of stocks worth $100 million. The beta of the
portfolio is 1.2. The company would like to use the CME December futures contract on the S&P
500 to change the beta of the portfolio to 0.5 during the period July 16 to November 16. The
index future price is currently 1,000 and each contract is on $250 times the index. What positions
the company should take? Also calculate the effect of your beta hedging strategy on the portfolio
value overall if the level of index moves from 1000 to 900 and four month future is 12% lower.

(4) Companies A and B have been offered the following rates per annum on a 100 lakhs rupee
loan for 5 years.

Fixed rate Floating rate

Company A 12.00% MIBOR+0.1%
Company B 14.5% MIBOR+0.9%

Company A requires a floating rate loan; company B requires a fixed rate loan. Design a swap
that will net a bank, acting as intermediary, 0.1% per annum and that will appear equally
attractive to both parties.