Financial Risk and Derivatives. Please, show your steps by hand.

2. a) A pension fund has an equity portfolio that is worth $18,450,000 based on the yesterday's closing prices in New York Stock Exchange (NYSE). The portfolio consists of stocks quoted in NYSE and its market beta is 0.95. S&P 500 index is currently at 2 050 and the contract size for S&P 500 futures is 50 times the futures index number. al) How could the pension fund hedge against the stock market risk for the next 4 months with the futures contracts on S&P 500 index for which the bid and ask quotes are as follows (please remember to also tell whether the long or short position is appropriate and for the required purpose): bid ask highest lowest latest volume SPM16 SPU16 SPZ16 2036.50 2029.00 2020.00 2037.50 2031.00 2025.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 expiration date 2016-06-09 2016-09-08 2016-12-08 0 0 0 open interest 0 0 0 settlement price 0 0 0 a2) Estimate the 5-day 99% VaR for the portfolio assuming that its annual volatility calculated on the basis of weekly returns from the most recent 1-year time window is 31.75%. b) A US company wishes to borrow British pounds at a fixed rate of interest, whereas a UK company wishes to borrow US dollars at a fixed rate of interest. The amounts required by the two companies are roughly the same at the current exchange rate. The companies have been quoted the following interest rates, which have been adjusted for the tax rate differences between US and UK companies: US company UK company Pounds 7.00 % 6.00 % Dollars 5.00 % 6.50 % b1) Design a swap that will net a swap bank, acting as intermediary, 20 basis points p.a. Make the swap equally attractive to the two companies and ensure that all foreign exchange risk is carried by the bank. b2) To what kind of risks the swap bank is exposed to and how could it hedge against such risks? 2. a) A pension fund has an equity portfolio that is worth $18,450,000 based on the yesterday's closing prices in New York Stock Exchange (NYSE). The portfolio consists of stocks quoted in NYSE and its market beta is 0.95. S&P 500 index is currently at 2 050 and the contract size for S&P 500 futures is 50 times the futures index number. al) How could the pension fund hedge against the stock market risk for the next 4 months with the futures contracts on S&P 500 index for which the bid and ask quotes are as follows (please remember to also tell whether the long or short position is appropriate and for the required purpose): bid ask highest lowest latest volume SPM16 SPU16 SPZ16 2036.50 2029.00 2020.00 2037.50 2031.00 2025.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 expiration date 2016-06-09 2016-09-08 2016-12-08 0 0 0 open interest 0 0 0 settlement price 0 0 0 a2) Estimate the 5-day 99% VaR for the portfolio assuming that its annual volatility calculated on the basis of weekly returns from the most recent 1-year time window is 31.75%. b) A US company wishes to borrow British pounds at a fixed rate of interest, whereas a UK company wishes to borrow US dollars at a fixed rate of interest. The amounts required by the two companies are roughly the same at the current exchange rate. The companies have been quoted the following interest rates, which have been adjusted for the tax rate differences between US and UK companies: US company UK company Pounds 7.00 % 6.00 % Dollars 5.00 % 6.50 % b1) Design a swap that will net a swap bank, acting as intermediary, 20 basis points p.a. Make the swap equally attractive to the two companies and ensure that all foreign exchange risk is carried by the bank. b2) To what kind of risks the swap bank is exposed to and how could it hedge against such risks