How can frictional unemployment be fixed.

Discuss protectionist policies.

What are supply side policies to combat unemployment.

An investor seeks to maximise his total return from fixed income securities and has been offered a Complex Bond from the local government. The investor may sell the Complex Bond back to the local government for a Strike Price at a single Option Date before the final maturity of the security. At the Option Date: If the investor decides to sell the bond, the Strike Price is paid to the investor and no further cashflows are paid. If the investor decides NOT to sell the bond, the local government will continue to pay any scheduled coupons and the final redemption payment The investor has been offered a Complex Bond with the following features: No coupons are payable throughout the life of the security, the bond is redeemable at a par of f100 million, with a final maturity term of 15 years. . The investor has an option to sell the security back to the local government at an Option Date in 10 years' time for a Strike Price of 190 million. Risk-free rates are set equal to the yield on the local government bonds which do NOT have options and are currently 2% p.a. at all terms continuously compounded From the investor's perspective, the Complex Bond can be decomposed into a long vanilla bond with a maturity term of 15 years and a bond option. (i) Outline the features of this bond option. 121 (ii) Calculate the flat level of the yield curve in 10 years' time that would mean the bond option was at the money. [1] (iii) Explain the key benefit to the investor of investing in the Complex Bond rather than the vanilla bond. [2]The investor now seeks to value the Complex Bond using Black's formula. Risk-free interest rates are still 2% p.a continuously compounded at all terms and the volatility of the forward bond price is 10%. (iv) Write down the Black Formula for valuing the bond option, defining all terms used. (2] (v) Calculate the value of the Complex Bond. [5] The investor seeks to understand how the sensitivity of the Complex Bond to interest rates could evolve over the maximum 15-year period. The investor has calculated that at time zero, the price of the Complex Bond will fall by about $30 million if interest rates rise from 2% to 6% p.a at all terms. (vi) Sketch a chart which shows how an increase in interest rates from 2% to 6% p.a. would affect the market value of the Complex Bond in each of the next 15 years from now. For the period beyond 10 years, you should assume that the Bond Option was not exercised. [4]A trader is considering investing in the shares of a company which has a current share price, S(0), of 10.2 per share. The trader is considering two different investment strategies over the following year: Strategy 1: short sell 1,000 shares for a year and invest in a risk-free one year bond with a fixed return of 1.7% on the initial investment. Strategy 2: short sell 1,000 shares for a year and purchase 1,000 call options with an expiry date in one year and a strike price of 14. The current price of the call option is 2. Invest the remaining cash in a risk-free one year bond with a fixed return of 1.7% on the initial investment. Any transaction costs can be ignored and it is assumed that no dividends are paid during the year. (i) Determine the values of the share price in one year's time such that Strategy 2 provides the higher profit. [4] (ii) Describe the effect of the announcement of a previously unexpected dividend on the value of a call option and a put option on the underlying stock. [2] A bank is writing an over-the-counter product tailored to an individual investor. Upon investment the bank deducts a fee of x% of the investment; the remainder is then invested in the product with it maturing after one year. The product provides a payoff of 99% of the value of the share price after one year (based on a share of the investor's choice) with a minimum guaranteed return of 2%.(Hii) Show that the amount paid to the investor at the end of the year is: P x(1-x%)x Max .0.995(1)/S(0),1.02) , where P is the amount invested, S(f) is the share price at time f ( measured in years from the investment date). assuming no dividends are paid during the year. [2] The trader above makes an investment of P in the bank's product based on the shares the trader currently holds. The bank models this share price based on a volatility of 25% per annum and a one year risk-free interest available to the bank of 1.5% continuously compounded. (iv) Determine the fee deducted of 1% which the bank should set for this product in order to make an expected risk-neutral overall profit of 3% of Pat time 0, stating any assumptions made. (Hint: Consider how the payoff to the trader as given in part (it) can be rearranged to include a term which can be valued as a call option.] [6] (v) Assess the effectiveness of the product as a form of profit generation to the bank, including considering a suitable hedging strategy. [3]