Derivatives 1st Edition Wendy L. Pirie - Solutions

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I f Lopez decides to use a swaption with STI to hedge the interest rate risk relating to the expansion loan, then Lopez should:A. sell a payer swaption.B. buy a payer swaption.C. buy a receiver swaption.
I f WMTC hedges the currency risk relating to the cash flows from its Spanish operations using the currency swap recommended by Lopez, WMTC would generate semiannual cash inflows from the swap closest to:A. $4.8 million.B. $8.4 million.C. $9.3 million.
I f WMTC hedges the interest rate risk on the five-year variable rate loan by using the interest rate swap recommended by Lopez, the net interest payment at the first settlement date in six months would be closest to:A. $300,000.B. $400,000.C. $800,000.
W MTC can achieve the bond portfolio duration target by using an interest rate swap with a notional principal closest to:A. $343 million.B. $353 million.C. $375 million.
T o achieve the target duration for the pension plan’s bond portfolio, WMTC should enter into an interest rate swap with a modified duration that is:A. negative, requiring WT MC to make fixed-rate payments and receive floating-rate payments.B. negative, requiring WT MC to make floating-rate
L opez will most likely achieve the pension plan’s equity reallocation objective by entering into an equity swap whereby WMTC receives a return on:A. $320 million of the S&P 500 Index and pays a return on $320 million of WMTC common stock.B. $280 million of the S&P 500 Index and pays a return on
T o achieve the target beta on Cassidy’s diversified stock portfolio, Elbridge would sell the following number of futures contracts (rounded to the nearest whole contract):A. 13.B. 20.C. 27.
W hat is the payoff to Cassidy in the equity swap example?A. −$269,500.B. $264,500.C. $269,500.
I f an options dealer takes the other side of the Sure option position, the dealer’s initial option delta and hedging transaction, respectively, will be:Dealer’s Initial Option Delta Dealer’s Hedging Transaction A. Negative Buy the underlying B. Positive Buy the underlying C. Positive Sell
The general shape of the profit-and-loss graph in Cassidy’s Comment #3 is most similar to the general shape of the profit-and-loss graph for:A. buying a call.B. selling a call.C. buying a put.
Cassidy’s Comments #1 and #2 about the Hop protective put and Sure covered call positions, respectively, are:Protective Put Covered Call A. Correct Correct B. Correct Incorrect C. Incorrect Incorrect
Disregarding the initial cost of the Hop collar strategy, the value per share of the strategy at expiration with the stock at $26.90 is:A. $26.05.B. $26.20.C. $26.90.
Based on Darc’s interest rate expectations for the euro currency zone and Switzerland, Gide’s best choice is to structure the currency swap so that Millau pays interest at a:A. fixed rate and receives it at a fixed rate.B. fixed rate and receives it at a floating rate.C. floating rate and
I f Millau issues euro-denominated debt and enters into a fixed-rate currency swap (in concern #4), which of the following best describes transactions between Millau and the swap counterparty in six months? Millau pays the swap counterparty:A. EUR 740,026 and receives CHF400,000.B. CHF400,000 and
Darc’s statement to Gide (in concern #3) about the option strategy to use in order to profit from a volatility increase of the euro/US dollar exchange rate is:A. correct.B. incorrect, because he is describing a strategy that benefits only from a weakening euro.C. incorrect, because he is
I f Gide uses a six-month forward currency contract to convert the yen received from the sale of the Japanese subsidiary into euros, the annualized return in euros that Millau will realize is closest to:A. 0.066%.B. 2.130%.C. 2.196%.
I f Gide uses a six-month forward currency contract to convert the yen received from the sale of the Japanese subsidiary into euros, the total amount Millau will receive is closest to:A. EUR490,714,000.B. EUR490,876,000.C. EUR491,038,000.
A company plans to borrow $20,000,000 in two years. The loan will be for three years and pay a floating interest rate of Libor with interest payments made every quarter. The company expects interest rates to rise in future years and thus is certain to swap the loan into a fixed-rate loan. In order
A diversified portfolio with a market value of $800,000,000 currently has the following allocations:Equity 80% $640,000,000 Bonds 20% $160,000,000 The equity portion of the portfolio is allocated as follows:US large-cap stocks 70% $448,000,000 International stocks 30% $192,000,000 The bond portion
The LKS Company is a US-based mutual fund company that manages a global portfolio 80% invested in domestic stocks and 20% invested in international stocks. The international component mimics the MSCI EAFE Index. The total market value of the portfolio is $750,000,000. The fund manager wishes to
Assume that settlement is made at the end of each year. Also assume that after one year the return on JK stock is 4% and the return on the S&P 500 market index is −3%.A. E xplain the structure of the equity swap.B. Calculate the net cash flow for the swap at the end of one year.
A portfolio has a total market value of $105,000,000. The portfolio is allocated as follows:$65,000,000 is invested in a broadly diversified portfolio of domestic stocks, and $40,000,000 is invested in the stock of the JK Corporation. The portfolio manager wishes to reduce exposure to JK stock by
A company based in the United Kingdom has a German subsidiary. The subsidiary generates€15,000,000 a year, received in equivalent semiannual installments of €7,500,000.The British company wishes to convert the euro cash flows to pounds twice a year. It plans to engage in a currency swap in
A US company needs to raise €100,000,000. It plans to raise this money by issuing dollar-denominated bonds and using a currency swap to convert the dollars to euros. The company expects interest rates in both the United States and the eurozone to fall.A. S hould the swap be structured with
A company issues a leveraged floating-rate note with a face value of $5,000,000 that pays a coupon of 2.5 times Libor. The company plans to generate a profit by selling the notes, using the proceeds to purchase a bond with a fixed coupon rate of 7% a year, and hedging the risk by entering into an
A ssume that you manage a $100 million bond portfolio with a duration of 1.5 years. You wish to increase the duration of the bond portfolio to 3.5 years by using a swap. Assume the duration of a fixed-rate bond is 75% of its maturity.A. Discuss whether the swap you enter into should involve paying
A company has issued floating-rate notes with a maturity of one year, an interest rate of Libor plus 125 basis points, and total face value of $50 million. The company now believes that interest rates will rise and wishes to protect itself by entering into an interest rate swap. A dealer provides a
Based on the data in Exhibit 1, Singh would advise Tills that the call option with the largest gamma would have a strike price closest to:A. $ 55.B. $ 67.50.C. $ 80.
Based upon Exhibit 1, and assuming the market price of Walnut’s shares at expiration is$66, the profit or loss, on a per share basis, from investing in Strategy 3, is closest to:A. –$1.57.B. $0.42.C. $1.00.
Based upon Exhibit 1, the maximum profit, on a per share basis, from investing in Strategy 2, is closest to:A. $2.26.B. $2.74.C. $5.00.
Based upon Exhibit 1, Strategy 1 is profitable when the share price at expiration is closest to:A. $63.24.B. $65.24.C. $69.49.
The option strategy that Singh is most likely to recommend to French is a:A. straddle.B. butterfly.C. box spread.
The option strategy Singh is most likely to recommend to Hopewell is a:A. collar.B. covered call.C. protective put.
Y ou believe that the market will be volatile in the near future, but you do not feel particularly strongly about the direction of the movement. With this expectation, you decide to buy both a call and a put with the same exercise price and the same expiration on the same underlying stock trading
A stock is currently trading at a price of $80. You decide to place a collar on this stock.You purchase a put option on the stock, with an exercise price of $75 and a premium of$3.50. You simultaneously sell a call option on the stock with the same maturity and the same premium as the put option.
A stock is currently trading at a price of $114. You construct a butterfly spread using puts of three different strike prices on this stock, with the puts expiring at the same time. You go long one put with an exercise price of $110 and selling at $3.50, go short two puts with an exercise price of
A stock is currently trading at a price of $114. You construct a butterfly spread using calls of three different strike prices on this stock, with the calls expiring at the same time. You go long one call with an exercise price of $110 and selling at $8, go short two calls with an exercise price of
Y ou expect a currency to depreciate with respect to the US dollar. The currency is currently trading at a price of $0.75. You decide to go long one put option on the currency with an exercise price of $0.85 and selling at $0.15, and go short one put option on the currency with an exercise price of
Y ou are bullish about an underlying that is currently trading at a price of $80. You choose to go long one call option on the underlying with an exercise price of $75 and selling at$10, and go short one call option on the underlying with an exercise price of $85 and selling at $2. Both the calls
A . Consider a US company, GateCorp, that exports products to the United Kingdom.GateCorp has just closed a sale worth £200,000,000. The amount will be received in two months. Because it will be paid in pounds, the US company bears the exchange risk. In order to hedge this risk, GateCorp intends
A pension fund manager expects to receive a cash inflow of $50,000,000 in three months and wants to use futures contracts to take a $17,500,000 synthetic position in stocks and $32,500,000 in bonds today. The stock would have a beta of 1.15 and the bonds a modified duration of 7.65. A stock index
Consider a portfolio with a 65% allocation to stocks and 35% to bonds. The portfolio has a market value of $200 million. The beta of the stock position is 1.15, and the modified duration of the bond position is 6.75. The portfolio manager wishes to increase the stock allocation to 85% and reduce
A n investment management firm has a client who would like to temporarily reduce his exposure to equities by converting a $25 million equity position to cash for a period of four months. The client would like this reduction to take place without liquidating his equity position. The investment
Consider an asset manager who wishes to create a fund with exposure to the Russell 2000 stock index. The initial amount to be invested is $300,000,000. The fund will be constructed using the Russell 2000 Index futures contract, priced at 498.30 with a $500 multiplier. The contract expires in three
A n investment management firm wishes to increase the beta for one of its portfolios under management from 0.95 to 1.20 for a three-month period. The portfolio has a market value of $175,000,000. The investment firm plans to use a futures contract priced at$105,790 in order to adjust the portfolio
A re Kreuzer’s statements about an advantage of VaR and about the Sharpe ratio, respectively, correct?Statement about an Advantage of VaR Statement about the Sharpe Ratio A. No No B. No Yes C. Yes Yes
I s Kreuzer correct in predicting the independent effects of the increase in the expected return and the increase in the correlation, respectively, on the calculated VaR of the Muth portfolio?Effect of Increase in the Expected Return Effect of Increase in the Correlation A. No No B. No Yes C. Yes No
T o make the desired change in Kalton’s credit risk exposure in corporate bonds, Kreuzer could recommend that Kalton take a position as a:A. seller in a credit default swap.B. buyer in a credit default swap.C. buyer of a put option on a corporate bond.
R egarding Kalton’s two derivatives positions, is Kreuzer correct about which party is bearing the credit risk of the currency forward contract and the put option on the DJ Euro STOXX Index, respectively?Currency Forward Contract Put Option on the DJ Euro STOXX Index A. No No B. No Yes C. Yes Yes
R egarding the three statements in the report that Stulz is preparing for Stimson Industries, the statement that is incorrect is:A. S tatement #1.B. S tatement #2.C. S tatement #3.
The monthly VaR that Stulz wants to estimate for the Stimson portfolio is closest to:A. €0.8 million.B. €2.9 million.C. €3.9 million.
Following are four methods for calculating risk-adjusted performance: the Sharpe ratio, risk-adjusted return on capital (RAROC), return over maximum drawdown (Ro-MAD), and the Sortino ratio. Compare and contrast the measure of risk that each method uses.
T ony Smith believes that the price of a particular underlying, currently selling at $96, will increase substantially in the next six months, so he purchases a European call option expiring in six months on this underlying. The call option has an exercise price of $101 and sells for $6.A. H ow much
R icardo Colón, an analyst in the investment management division of a financial services firm, is developing an earnings forecast for a local oil services company. The company’s income is closely linked to the price of oil. Furthermore, the company derives the majority of its income from sales
I ndicate which of the following statements about credit risk is (are) false, and explain why.A. B ecause credit losses occur often, it is easy to assess the probability of a credit loss.B. One element of credit risk is the possibility that the counterparty to a contract will default on an
A n organization’s 5% daily VaR shows a number fairly consistently around €3 million.A backtest of the calculation reveals that, as expected under the calculation, daily portfolio losses in excess of €3 million tend to occur about once a month. When such losses do occur, however, they
A . A firm runs an investment portfolio consisting of stocks as well as options on stocks.Management would like to determine the VaR for this portfolio and is thinking about which technique to use. Discuss a problem with using the analytical or variance–covariance method for determining the VaR
Consider a $10 million portfolio of stocks. You perform a Monte Carlo simulation to estimate the VaR for this portfolio. You choose to perform this simulation using a normal distribution of returns for the portfolio, with an expected annual return of 14.8% and a standard deviation of 20.5%. You
Y ou invested $25,000 in the stock of Dell Computer Corporation in early 2011. You have compiled the monthly returns on Dell’s stock during the period 2006–2010, as given below.2006 2007 2008 2009 2010−0.0214 −0.0347 −0.1824 −0.0723 −0.1017−0.0106 −0.0566 −0.0070 −0.1021
A n analyst would like to know the VaR for a portfolio consisting of two asset classes: longterm government bonds issued in the United States and long-term government bonds issued in the United Kingdom. The expected monthly return on US bonds is 0.85%, and the standard deviation is 3.20%. The
S uppose you are given the following sample probability distribution of annual returns on a portfolio with a market value of $10 million.Return on Portfolio Probability Less than −50% 0.005−50% to −40% 0.005−40% to −30% 0.010−30% to −20% 0.015−20% to −10% 0.015−10% to −5%
E ach of the following statements about VaR is true except:A. VaR is the loss that would be exceeded with a given probability over a specific time period.B. E stablishing a VaR involves several decisions, such as the probability and time period over which the VaR will be measured and the technique
A . A n organization’s risk management function has computed that a portfolio held in one business unit has a 1% weekly value at risk (VaR) of £4.25 million. Describe what is meant in terms of a minimum loss.B. The portfolio of another business unit has a 99% weekly VaR of £4.25 million (stated
Ford Credit is the branch of Ford Motor Company that provides financing to Ford’s customers.For this purpose, it obtains funding from various sources. As a result of its interest rate risk management process, including derivatives, Ford Credit’s debt reprices faster than its assets. This
A large trader on the government bond desk of a major bank loses €20 million in a year, in the process reducing the desk’s overall profit to €10 million. Senior management, on looking into the problem, determines that the trader repeatedly violated his position limits during the year. They
S ue Ellicott supervises the trading function at an asset management firm. In conducting an in-house risk management training session for traders, Ellicott elicits the following statements from traders:Trader 1 “Liquidity risk is not a major concern for buyers of a security as opposed to
N atWest Markets (NWM) was the investment banking arm of National Westminster Bank, one of the largest banks in the United Kingdom. On 28 February 1997, NWM revealed that a substantial loss had been uncovered in its trading books. During the 1990s, NatWest was engaged in trading interest rate
S tewart Gilchrist follows the automotive industry, including Ford Motor Company. Based on Ford’s 2003 annual report, Gilchrist writes the following summary:Ford Motor Company has businesses in several countries around the world. Ford frequently has expenditures and receipts denominated in non-US
Discuss the difference between centralized and decentralized risk management systems, including the advantages and disadvantages of each.
The option trade that Nuñes should recommend relating to the government committee’s decision is a:A. collar.B. bull spread.C. long straddle.
Based on Exhibit 1, the best explanation for Nuñes to implement Strategy 8 would be that, between the February and December expiration dates, she expects the share price of XDF to:A. decrease.B. remain unchanged.C. increase.
Based on Exhibit 1, the maximum gain per share that could be earned if Strategy 7 is implemented is:A. €5.74.B. €5.76.C. unlimited.
Based on Exhibit 1, the breakeven share price for Strategy 6 is closest to:A. €22.50.B. €28.50.C. €33.50.
Based on Exhibit 1, Strategy 5 offers:A. unlimited upside.B. a maximum profit of €2.48 per share.C. protection against losses if QWY’s share price falls below €28.14.
S trategy 5 is best described as a:A. collar.B. straddle.C. bear spread.
Based on Exhibit 1, the maximum loss per share that would be incurred if Strategy 4 was implemented is:A. €2.99.B. €3.99.C. unlimited.
Based on Exhibit 1, the breakeven share price of Strategy 3 is closest to:A. €92.25.B. €95.61.C. €95.82.
Based on Exhibit 1, Nuñes should expect Strategy 2 to be least profitable if the share price of IZD at option expiration is:A. less than €91.26.B. between €91.26 and €95.00.C. more than €95.00.
S trategy 1 would require Nuñes to buy:A. shares of IZD.B. a put option on IZD.C. a call option on IZD.
L ee’s put-based hedge strategy for Solomon’s ETF position would most likely result in a portfolio gamma that is:A. negative.B. neutral.C. positive.
The strategy suggested by Lee for hedging small moves in Solomon’s ETF position would most likely involve:A. selling put options.B. selling call options.C. buying call options.
The valuation inputs used by Lee to price a call reflecting Solomon’s interest rate views should include an underlying FRA rate of:A. 0.60% with six months to expiration.B. 0.75% with nine months to expiration.C. 0.75% with six months to expiration.
Based on Solomon’s observation about the model price and market price for the put option in Exhibit 2, the implied volatility for the GPX is most likely:A. less than the historical volatility.B. equal to the historical volatility.C. greater than the historical volatility.
Which of the following is the correct answer to Solomon’s question regarding the option Greek letter?A. Vega B. Theta C. Gamma
What are the correct spot value (S) and the risk-free rate (r) that Lee should use as inputs for the Black model?A. 186.73 and 0.39%, respectively B. 186.73 and 2.20%, respectively C. 187.95 and 2.20%, respectively
T o determine the long put option value on TCB stock in Exhibit 1, the correct BSM valuation approach is to compute:A. 0.4404 times the present value of the exercise price minus 0.6217 times the price of TCB stock.B. 0.4404 times the present value of the exercise price minus 0.3783 times the price
Based on Exhibit 1 and the BSM valuation approach, the initial portfolio required to replicate the long call option payoff is:A. long 0.3100 shares of TCB stock and short 0.5596 shares of a zero-coupon bond.B. long 0.6217 shares of TCB stock and short 0.1500 shares of a zero-coupon bond.C. long
L ee’s statement about the assumptions of the BSM model is accurate with regard to:A. interest rates but not continuous prices.B. continuous prices but not the return distribution.C. the stock return distribution but not the volatility.
Which of Sousa’s reasons for the decrease in the value of the interest rate option is correct?A. R eason 1 only B. R eason 2 only C. Both Reason 1 and Reason 2
Based on Exhibit 2 and the parameters used by Sousa, the value of the interest rate option is closest to:A. 5,251.B. 6,236.C. 6,429.
Which of Sousa’s statements about binomial models is correct?A. S tatement 1 only B. S tatement 2 only C. Both Statement 1 and Statement 2
The value of the American-style put option on Beta Company shares is closest to:A. 4.53.B. 5.15.C. 9.32.
The value of the European-style call option on Beta Company shares is closest to:A. 4.83.B. 5.12.C. 7.61.
F or the Alpha Company option, the positions to take advantage of the arbitrage opportunity are to write the call and:A. short shares of Alpha stock and lend.B. buy shares of Alpha stock and borrow.C. short shares of Alpha stock and borrow.
The value of the Alpha Company call option is closest to:A. 3.71.B. 5.71.C. 6.19.
The risk-neutral probability of the up move for the Alpha Company stock is closest to:A. 0.06.B. 0.40.C. 0.65.
The optimal hedge ratio for the Alpha Company call option using the one-period binomial model is closest to:A. 0.60.B. 0.67.C. 1.67.
Based on Exhibit 6 and the three-month US dollar Libor at expiration, the payment amount that the bank will receive to settle the 6 × 9 FRA is closest to:A. $19,945.B. $24,925.C. $39,781.
Based on Exhibit 7, the fixed rate on a new 2 × 5 FRA is closest to:A. 0.61%.B. 1.02%.C. 1.71%.
Based on Exhibit 7, the no-arbitrage fixed rate on a new 1 × 4 FRA is closest to:A. 0.65%.B. 0.73%.C. 0.98%.

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Derivatives 1st Edition Wendy L. Pirie - Solutions

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