1. Oil prices have been on a run and have increased from $30 a barrel a year ago to $40 dollars six month ago to today's spot price being $60 a barrel. Henry's plastic company uses oil as to make plastic parts and is concerned that he will have to increase the price of his goods, if oil prices continue to increase. As such he would like to lock in the future price of his raw materials by entering into an agreement with a producer that may wish to take an offsetting position. The oil company, Oilco is in agreement to do the swap and that way they can both lock in their future production. The one year forward price at which they will transact is $65. One year later - spot prices are actually $62 a barrel. Who made a profit/loss and how much were the losses/gains? The volume of oil contracted between the two parties is 35,000 barrels.
2. It's a hot housing market and you are offered for purchase an option from a real estate developer to buy a house that in 5 years (use 5 times 365 as the number of days) could be worth anywhere between $2.0 million or $400,000 depending on regulations the government might impose. His option would cost you upfront $300,000, which sounds like a lot, but you are not sure what to do. This private option would allow you to buy the house for $900,000. Mortgage rates have risen and are now 6%. Today that house price is $1.0 million. a) Use the binomial method to estimate the fair value of the call option on the house b) Break apart your answer into both the fundamental value of the option and its speculative/time value. c) Should you buy the real estate developer's option or not? Show whether you would make a loss or a profit.
3. Interest rates have fallen around the world making it difficult to make money. Your home country is the Philippines but you think that since interest rates are higher in India that maybe that is where you should invest your family's 4,000,000 pesos. Currently, one year rates in the Philippines are quoted at only 1.0% but in India local interest rates are 3.5%. Inflation in the Philippines over the course of your investment period is expected to be 0.5% and in India 2.0%. The forward rate you are quoted is one Filipino Peso buys 1.547365 Rupee. a) What must the spot currency rate be for you to be indifferent between investing in either country? Please calculate you currency rate to 6 decimal places. b) Explain why the Indian Rupee is trading at a discount or a premium and what does that mean to be trading at a premium or discount?
4. An investment site suggests that the time value of an option is worth $7.00 and the current market price of the shares is $62.00. The fundamental value of the option is $13. a) What is the option's strike price? b) What is the value of the option? Show all your calculations clearly.
5. A treasurer is concerned that interest rates could rise "anytime" and would like to lock in the company's borrowing costs. The company needs to borrow $250,000,000. Presently, bond Futures contracts are quoted at $110.00 in the market. Assume Futures contacts are on ten year bonds and are standardized in $100,000 par value per contract. The Futures contract is also based on a ten year bond, with a 6% coupon and pays interest semi-annually. The treasurer used Futures contracts to hedge an expected move upward in interest rates of an additional 2.0%. a) What was the total profit or loss on the Futures contracts? b) Did the treasurer buy or sell Futures to offset the expected increase in rates - answer clearly please? Show you work in detail.