DEF PLC, a food manufacturing company, wants to hedge its exposure to wheat prices. Therefore, on 17^th June 2020 it negotiates a long futures contract for 100,000 bushels of wheat deliverable December 2020. The exchanges initial margin requirement is $50,000 and the margin call threshold is $30,000. The dynamics of the wheat futures prices shortly after the contract has been negotiated are the following:

Date	Futures price, $ per bushel
17/06/2020	4.75
18/06/2020	4.61
19/06/2020	4.63
22/06/2020	4.53
23/06/2020	4.40
24/06/2020	4.44
25/06/2020	4.49
26/06/2020	4.12
29/06/2020	3.91
30/06/2020	3.80
01/07/2020	4.80

Question 5: Identify the total payoff of the futures contract at 1^st July 2020?

a) $100,000

b) -$100,000

c) $5,000

d) -$5,000

e) Impossible to calculate without knowing the wheat spot price on 1^st July 2020

Question 6: Calculate the total margin payments payable to the exchange up to 1^st July 2020?

a) $145,000

b) $84,000

c) $63,000

d) $113,000

e) $134,000

On 1^st July 2020 the spot price is $4.31 per bushel, the annual risk-free interest rate is 2.40% per annum and the present value of rental payments for the warehouse sufficient to store 100,000 bushels over a 6-month period is $40,000.

Question 7: Calculate the value, if any, of the riskless profit that DEF can obtain from arbitraging on the futures market, assuming that all rent is payable at the beginning of the storage period and interest on loans and deposits is charged semi-annually.

a) $9,000

b) $3,348

c) $3,828

d) $49,000

e) No riskless profit can be obtained from arbitrage

Question 8: Calculate the present value of rental payments at which DEF would be indifferent towards arbitrage, assuming no trading costs.

a) $43,308

b) $36,692

c) $0

d) $49,000

e) Arbitraging is not beneficial to DEF regardless of the present value of rental payments

Assume a current underlying share price is 99.5p and the implied volatility is 24% per annum. If an investor believes the volatility of the underlying share price will be 27% and the expected share price at the expiry date will be 92.5p per share, identify which one of the following strategies will be consistent with their forecast

a) Short call

b) Condor

c) Strangle

d) Strip

e) Strap

Questions 13 to 16 are based on the following scenario:

The table below shows the option book for the European options tradable for the share of ABC PLC expiring on 19^th June 2020. On 1^st June 2020, an investor intends to develop an option trading strategy. The share price of ABC PLC on 1^st June 2020 is 99.5p per share.

Calls				Puts
Strike	Bid	Ask	Last	Strike	Bid	Ask	Last
95	5.3	5.7	5.4	95	1.4	1.8	1.5
100	2.1	2.3	2.2	100	2.1	2.4	2.3
105	1.2	1.6	1.4	105	5.4	5.7	5.5

Question 13: Identify the net payoff per share of a butterfly strategy using puts if the underlying share price is 101p per share

a) 2.0p

b) 0.7p

c) 3.2p

d) -3.8p

e) 1.9p

Question 14: Identify the maximal downside per share of an optimal butterfly strategy

a) -1.9p

b) -2.0p

c) -3.1p

d) -3.3p

e) Unlimited downside

Question 15: Identify the net payoff per share of a strip strategy if the underlying share price is 103p per share

a) -3.3p

b) -0.3

c) -4.1p

d) -1.1p

e) -4.0p

Question 16: Assume the investor expects the share price of ABC on 19^th June 2020 to equal 104p per share. Identify which of the following strategies a rational investor would prefer

a) Butterfly

b) Straddle

c) Strangle

d) Strip

e) Strap

ABC PLC is entering a three-year single name credit default swap with credit performance of DEF PLC as its underlying. The annual probability of default for DEF PLC is assessed at 2.71% and the recovery rate is estimated at 30%.

Question 19: Assuming all defaults occur mid-year and the annual cost of finance for ABC PLC is 4.56%, calculate the equilibrium swap rate for the credit default swap

a) 202bps

b) 84bps

c) 192bps

d) 197bps

e) 199bps

Question 20: If the swap rate for the credit default swap is 252bps, calculate the implied annual probability of default for DEF PLC

a) 3.46%

b) 3.40%

c) 3.35%

d) 3.54%

e) 3.60%