1What is the impact on the value of a swap if, ceteris paribus, the volatility of interest rates rises?

2In the absence of interest-rate uncertainty and delivery options, futures and forward prices must be the same. Does this mean the two contracts have identical cash-flow implications? (Hint: Suppose you expected a steady increase in prices. Would you prefer a futures contract with its daily market-to-market or a forward with its single market-to-market at maturity of the contract? What if you expected a steady decrease in prices?)

3You have a position in 2000 shares of a technology stock at 200 Australian dollars per share with an annualized standard deviation of changes in the price of the stock being 30 percent. Say that you want to hedge this position over a one-year horizon with a technology stock index. Suppose that the index value has an annual standard deviation of 20 percent. The correlation between the stock and index annual changes is 0.8. A unit of the index is 250 equivalent to Australian dollars. How many units of the index should you hold to have the best hedge? Do you go long or short the index?

4Three months ago, an investor entered into a six-month forward contract to sell a stock. The delivery price agreed to was $55. Today, the stock is trading at $45. Suppose the three-month interest rate is 4.80% in continuously compounded terms.

1. (a)Assuming the stock is not expected to pay dividends over the next three months, what is the current forward price of the stock?
2. (b)What is the value of the contract held by the investor?
3. (c)Suppose the stock is expected to pay a dividend of $2 in one month, and the one- month rate of interest is 4.70%. What are the current forward price and the value of the contract held by the investor?

5Two firms X and Y are able to borrow funds as follows:

(a) Fixed-rate funding at 4% and floating rate at Libor1%. (b) Fixed-rate funding at 6% and floating rate at Libor+1%.

Show how these two firms can both obtain cheaper financing using a swap. What swap would you suggest to the two firms if you were unbiased advisor?