Please answer question 7, thank you!!!!!

Fall 2016 EXERCISE QUESTIONS FOR THE FINALExAM (FIN 480-DERIVATIVES) 1. Assume that you are managing an equity portfolio worth $5,000,000, and you are considering hedging your portfolio over the next three months. The hedging instrument is the S&P 500 index futures which matures in four months. The contract has been written on $250 times the index Right now, the index is 1990, while the S&P futures price is 1980. Your portfolio has a beta value of 0.85. The risk-free rate of interest is 2%, and the dividend yield on index is 2% per annum. Discuss your hedge strategy and compute the expected value of your hedged portfolio, assuming that the ndex falls to 1850 in 3 months and the futures price is 1815 2. Suppose that Treasury bills maturing in 3 months, 6 months, and 1 year are selling for $99.75, 99.25 and 98.75, respectively; and a Treasury note maturing in 1 and half years paying a 4% semiannua coupon is selling at par. Construct the forward curve for periods extending out to 1.5 years Interpret what these rates are telling you 3. Suppose that a financial institution has agreed to pay 6-month LIBOR and receive 3.5% per annum with semiannual compounding) on a notional principal of $200 million. The swap has a remaining of years. 1.25 The LIBOR rates with continuous compounding for 3-month, 9-month, and 15- month maturities are 2.25%, 2.35%, and respectively. The 6-month LIBOR rate at the last payment date was 2% (with semiannual compounding. Compute the value of the swap terms of FRAs 4. It is August 2 and a fund manager with $20 million invested in government bonds is concerned tha nterest rates are expected to be highly volatile over the next 3 months. The manager futures price is 94-04 ch contract is for the delivery of $100,000 face value of bonds. Suppos that the duration bond portfolio in 3 month years. The cheapest-to-deliver bond in the T-bond contract is expected to be a 20-year 8% per annum coupon bond. The yield on this bond is currently 6%, and the duration will be 8.20 years at maturity of he futures contract. Dis how the fund manager would hedge Sliweow the nteressrate risk 5. suppose that stock x is currently selling for $85 but elprice can change over the next a binomial stochastic process by a 40% matching volatility. There is a European stock ca with an exercise price of $80. The risk-free rate of interest today is 2.5%. Compute the option delta and the price for the call by using the risk neutral valuation method $40. Assume e current price i that there are two time steps, and in each time step the stock price either moves 10% or moves down by 10%. We also suppose that the risk-free rate of interest is 2%. Compute the value of the put using the recombining binomial tree under the assumption that the option is European and umption that the option is America that an buys a 3 corporate and a 3-year CDS to buy protection against the issuer the bond defaulting. The probability of a entity defaulting during a year conditional upon no earlier defau the continuously compounding ris 2% also that the CDs buyer pays 2.25% of the principai every year. The buyer is expected to recover 80% of the face value of the bond. bankruptcyis not