Consider a 3-year forward contract for an investment asset that provides no income. The spot price for the investment asset is $40, and the prevailing risk-free rate is 6%.  What is the forward price? 

 

Suppose that for a Treasury bond futures contract, the cheapest-to-deliver bond is a 4% coupon bond with a quoted price of 114.50 and conversion factor of 1.3150.  The futures contract matures in six months and the next coupon will be paid in six months. There is no accrued interest. The six-month risk-free interest rate is 5%.  What is the value of the Treasury bond futures contract? 

 

3. Consider an interest rate swap that was entered into several years. There is 15 months remaining on the swap. The swap rate is 6.10% and the reference interest rate is 6-month LIBOR.  The frequency with which the interest rate payments are swapped is semi-annually.

6-month LIBOR is determined to be

3 months from now   4.20%

9 months from now   4.7%

15 months from now  5.00%

Last six month   5.4%

a.  Determine the value of this swap for the two parties for a notional amount of $100. 

b.  Determine the value of this swap for the two parties for a notional amount of $165,000. 

c.  Suppose instead that 6-month LIBOR in this illustration has been higher. Would happen to the value of the swap for each counter party? 

 

4. A fixed-for-fixed currency swap was entered into by the Magic Corporation several years. The two currencies are the U.S. dollar and the euro. Today there are three more years remaining on the life of the swap.  The notional amount for the two currencies is $1,000,000 and €862,000. The currency swap requires that Magic corporation pay 6.8% on the notional amount on $1,000,000 each year and receive 5.4% on the notional amount each year of the €862,000.  Cash flows in euros are discounted at 5% and cash flows in dollars are discounted at 5.7%.  In the third year when principal payments are swapped, the exchange rate is expected to be such that 0.90 euros can be exchanged for $1.

i. What is the value of this currency swap?  

ii. If in the third year when the principal is to be exchanged is expected to be 1 euro exchange for 1 U.S. dollar, what would be the value of the currency swap? 

5. Determine the intrinsic value and time value for each of the options below