1. In TWO LINES (Maximum) As CFO, how would you respond to your company CEOs comment?

Last year we had a substantial income in New Zealand (NZ) dollar, which we hedged by selling NZ dollar forward. In the event NZ dollar rose, and our decision to sell forward cost us a lot of money. I think that in future we should either stop hedging our currency exposure or just hedge when we think NZ dollar is overvalued.

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2. The current level of Standard & Poor's index is 500. The prospective dividend yield is 2%, and the interest rate is 6%. What is the value of a one-year futures contract on the index? (Assume all dividend payments occur at the end of the year.)

A) 530

B) 520

C) 540

D) None of the above

3. An oil producer would sell, rather than buy, crude oil futures for protection from falling prices.

a) True b) False

Why?_____________________________________________________________

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4. (Ch 3: Section 3.2.) In bond valuation, we learned that bond price volatility was a function of years to maturity and size of coupon e.g., the longer the term to maturity (TTM) or the smaller the coupon, the greater the bond price volatility. Duration is a measure of effective maturity, accounting for both term to maturity and coupon size. Read Section 3.2 (Ch. 3) and then calculate the duration of a 10-year, $1000 face-value bond with a 9% coupon-rate, assuming that the yield to maturity (market interest rate) was 10%. Also calculate the bond volatility (Percent) and tell what it mean?