1. A. Form a $10,000,000 bond portfolio of 5 bonds. Make sure there are disparities in maturity, coupon, and yield to maturity. That said, dont get too exotic. You will be calculating a futures hedge ratio for this portfolio. --Calculate individual durations of each of the bonds at t = ? ( t =? should correspond to the delivery month of the futures contract you will be using for the hedge.) To calculate the duration at some point in the future simply shorten the time to maturity by that length of time. --Calculate the duration of the portfolio as a whole at t = ? Remember this is a simple weighted average. See the example on the slide on Modified Duration_000 in Additional Slides on D2L. --Determine the hedge ratio of the portfolio using bond futures by using the formula 6.5 on page 148 of the book. You may also reference example 6.6 on page 149.

B. Set up an interest rate swap from fixed to floating. To start, assume a notional amount for the swap. Make sure all available Quality Spread Differential is allocated to one or the other party. C. Choose a stock without a dividend from the NYSE or NASDAQ. NASDAQ stocks are less likely to pay a dividend. Be sure that options trade actively on the stock you pick. Yahoo Finance can be a good resource for finding information. Use the Black Scholes Merton Option Pricing Model to calculate the value of a European option on the stock you chose. On the day you calculate this value, observe the actual closing price on that option and include this and the date of observation in your report. (Remember how critical it is to use PEMDAS when calculating the option value.) D. Make a presentation to the class on what you have done. Everyone in the group must participate in the presentation. Failure to present will cost you a 50% penalty for the project. Also, an obvious lack of understanding of your groups project when presenting will be evidence of a lack of participation in the projects creation and can also be cause for a reduction in your grade for the project separate from the grade for the project as a whole.