Explain in details.
4. You boughtan option that limits the interest rate on a future six-month deposit to at least 10 percent p.a. (a) If, at the beginning of the six-month period, the interest rate is 11 percent, what is the market value of this option? (b) What is the option's value if the interest rate turns out to be 8 percent?1. For each pair shown below, which of the two describes a forward contract? Which describes a futures contract? (a) standardized/made to order (b) interest rate risko interest rate risk (c) ruin risko ruin risk even when there is a matching cash flow at T (d) short maturities/even shorter maturities (e) no secondary market/liquid secondary market (f) for hedgers/speculators (g) more expensive/less expensive (h) no credit risk/credit risk (i) organized marketo organized market2. Match the vocabulary below with the following statements. (1) organized market (11) maintenance margin (2) standardized contract (12) margin call (3) standardized expiration (13) variation margin (4) clearing corporation (14) open interest (5) daily recontracting (15) interest rate risk (6) marking to market (16) cross-hedge (7) convergence (17) delta-hedge (8) settlement price (18) delta-cross-hedge (9) default risk of a future (19) ruin risk (10) initial margin (a) Daily payment of the change in a forward or futures price. (b) The collateral deposited as a guarantee when a futures position is opened. (c) Daily payment of the discounted change in a forward price.4. On June 1, 2000, the FLY has depreciated to WAF 0.90, but the six-month interest rates have not changed. In early 2001, the FLY is back at par. Compute the gain or loss (and the cumulative gain or loss) on two consecutive 180-day forward sales (the first one is signed on Jan. 1, 2000), when you start with a FLY 500,000 forward sale. First do the computations without increasing the size of the forward contract. Then verify how the results are affected if you do increase the contract size, at the roll-over date, by a factor 1 + re - -that is, from FLY 500,000 to FLY 512,500.6. Compare the analyses in Exercises 4 and 5 with a rolled-over money-market hedge. That is, what would have been the result if you had borrowed war for six months (with conversion and investment of FLY-the money-market repli- cation of a six-month forward sale), and then rolled-over (that is, renewed) the WAF loan and the FLY deposit, principal plus interest?1. Michael Milkem, an ambitious MBA student from Anchorage, Alaska, is looking for free lunches on the foreign exchange markets. Keeping his eyes glued to his Reuters screen until the wee hours, he spots the following quotes in Tokyo: Exchange rate: Spot NZD/USD 159-1.60 JPY/USD 100-101 NZD/GBP 225-2.26 JPY/GBP 150-152 180 - day Forward NZD/USD 1615-1.626 JPY/USD 97.96-98.42 NZD/GBP 2265-2.274 JPY/GBP 146.93-149.19 Interest rates (simple, p.a.) 180 days USD 9%-5.25% JPY 3%-3.25% NZD 8%-8.25% GBP 7/%-7.25% Given the above quotes, can Michael find any arbitrage opportunities?2. us-based Polyglot Industries will send its employee Jack Pundit to study Danish in an intensive training course in Copenhagen. Jack will need DKK 10,000 at t = 3 months when classes begin, and DKK 6,000 at t = 6 months, t = 9 months, and t = 12 months to cover his tuition and living expenses. The exchange rates and p.a. interest rates are as follows: 15:01 on 8 March 2009 P. Sercu, K.U.Leuven SB&E 31 DKK/USD Exchange rate p.a. interest rate uso pa. interest rate DKK Spot 5.820-5.830 90 days 5.765-5.770 3.82-4.07 8.09-8.35 180 days 5.713-5.720 3.94-4.19 8.00-8.26 270 days 5.660-5.680 4.13-4.38 7.99-8.24 360 days 5.640-5.670 4.50-4.75 7.83-8.09 Polyglot wants to lock in the DKK value of Jack's expenses. Is the company indifferent between buying DKK forward and investing in DKK for each time period that he should receive his allowance
