1. Calculate your USD absolute and percentage gain/loss for the following trade. You sell 500 million GBPJPY forward 1 year at 128.00 JPY per GBP. You are selling GBP (500 million GBP) and buying JPY (Japanese Yen). Your AUM is 300 million USD.

Currently the spot rates are:

GBPJPY= 130.00 JPY per GBP

GBPUSD= 1.25 USD per GBP

USDJPY= 104.00 JPY per USD

GBPJPY 1 year forward rate = 128.00 JPY per GBP

In one years, time the spot rates are:

GBPJPY= 120.00 JPY per GBP

GBPUSD= 1.20USD per GBP

USDJPY= 100.00 JPY per USD

What is your gain/loss in USD (absolute and percentage return on AUM) for having sold 500 million GBPJPY forward at 128.00? (Sold 500 million GBP, buying JPY forward at 128.00 JPY per GBP). Remember your AUM is 300 million USD.

2. Selender has 200 million dollars under management. He is long 100,000 shares of stock A which is priced at 20 dollars per share. He is short 50,000 shares of Stock B, which is trading at 40 dollars per share. What are his net and gross dollar exposures in dollar terms and percentage-wise of the AUM? If the Beta of stock B is greater than the Beta of stock A, what can we say about the Beta of the Selenders portfolio? Suppose Stock A falls to 15$ and stock B rises to 45$, and Selender does not change his positions, how much has Selender won or lost? What is his new net and gross dollar percentage exposure? Assume now that instead of the Beta of stock A being greater than the Beta of stock B, the Betas of the two stocks are equal? What can we say now about the Beta of the portfolio after the price movements?

3. You are spread trading. In each case ,state which bond/note you buy and which you sell short. A) You believe that the market is over-estimating the probability of Italy defaulting on its Treasury bonds. You also believe that the market will re-adjust its opinion to match yours. You have 10 year Italian Treasuries and 10 year German Treasuries available. B) You believe that due to low interest rates, investors have been chasing yield for the last few years. You also believe that investors are going to continue chasing yield aggressively. You have available 5-year BB corporate bonds and 5-year Treasury notes. C) You believe that the term structure of interest rates will become more upward sloping in the near term. You have available 2-year Treasury notes and 10-year Treasury notes.

4. What is the purpose of using a call spread on RUBUSD instead of a buying RUB forward, when initiating a carry trade? I would like to use options on RUB futures to do a carry trade on RUBUSD. Assume the current spot rate is .01516 USD per RUB and the December futures price is .01503 USD per RUB. The notional of 1 contract is 2,500,000 RUB. The call prices for strikes .01500 USD per RUB and .01600 USD per RUB are respectively .000380 USD per RUB and .000110 USD per RUB; quoted USD per RUB where .000005 = 12.50 USD. If my underlying portfolio has AUM 25,000,000 RUB equivalent and I do not wish to lever, how many contracts should I use; and what would be the break-even futures price, the worst case, and the best case? For best case and worst case you need to state at what futures price(s) it occurs and the amount.

5.

The following Table supplies short term interest rates for different Currencies across maturities. Using that information and the strict definition of the Carry Trade, being that you can only go long the higher interest rate currency for a currency pair; determine which of the following trades are Carry Trades and which are not.

1. Buy EUR Inverse ETF
2. Buy GBP Futures

c. Buy forward 1 year GBPAUD (buy GBP,sell AUD)

d. Buy CHF ETF

Interest rates (Percentages) Across Currencies

Maturity	EUR	USD	GBP	AUD	JPY	CHF
1 Month	-.51	2.13	.71	1.00	-.14	-.90
6 Month	-.46	2.03	.81	.85	-.05	-.83
1 Year	-.39	1.95	.88	.75	.03	-.74

6.

During a financial crises, explain what likely would happen to the following, and why?

A) Equity Long/short market neutral funds.

B) The USDJPY (Will USD appreciate or depreciate?)

C) Spreads between Single B Corporates and Treasuries?

D) Spreads between off-the-run and on-the-run treasuries?

7.

Assume the USD yield curve is upward sloping. I want to do a fixed income Carry Trade with Interest Rates Swaps. Should I be the Fixed Rate Payer or Fixed Rate Receiver in a traditional vanilla Interest Rate Swap? If I shorted 2 year T-Notes and went long 10 year T-notes would I be doing a carry trade? What if I wanted to use an OIS (overnight indexed swap) to do a carry trade on EUR given the term structure is upward sloping; would I be the fixed rate payer or receiver, and would I use SONIA, ESTER, or SOFR?

8.

In class, we discussed an analytical International Equity Long/Short Fund (UBS OConner). Answer the following questions concerning this Fund:

1. We have two industries; the COMEDY industry and the Drug industry. We have two countries; USA and France. We believe the market has correctly priced the stocks we are analyzing, except for their sales in Switzerland. We believe that the market is underestimating the Swiss Economys future performance. In the comedy industry Friedman Co is a USA company with 30% of its sales in Switzerland, and the Dunn Company is a French company with 5% of its sales in Switzerland. In the Drug Industry, the Roland Morris(not to be confused with Philip Morris) Company is a USA company with 10% of sales in Switzerland, and the Madison Parry Company is a French company with 40% of its sales in Switzerland. Would we go long the same country in both Comedy and Drugs, and go short the same country in both Comedy and Drugs? If not, what would we do instead and why?
2. Why did the Global quantitative long/short Fund perform better than most market neutral Long/Short Equity Funds in 2008 yet did poorly relative to its own past performance?