1. Please compute the quarterly payment and indicate if it is due to or due from a bank assuming a threshold amount of $0 million on an equity total return short swap position of $100 million in stock A. Assume the opening stock price was $50, the closing stock price was $45, the annual libor rate was 2.0%, the libor spread was 1%, the annual borrow fee was 1% and the stock paid a $0 quarterly dividend? ________________.
2. Assume a two-year plain vanilla credit default swap with annual payments, where the risk-free zero curve is flat at 5% per annum with continuous compounding and where a bond default can only occur at the end of a year. Suppose that the recovery rate is 30% and the unconditional probabilities of default (as seen at time zero) is 1% for all years. 1What is the present value of all of the expected swap payments? _____________. 2What is the present value of all of the expected counterparty payoffs?_________.3What is the appropriate CDS spread? __________4What is the value of the contract to the CDS buyer id the original spread was 100b.p. when purchased? ____________.
3. Assume a convertible bond with an annual coupon of 2%, a 5-year term, a market yield on straight of 4%, Treasury rate of 1%, repo of 1%, reverse repo of .75%, margin credit of .50%, share price of $25, conversion ratio of 50:1 and a delta value of .50. ________________. 1What is the implied options price per share based on the bonds fixed income value if the bond is trading at 102? ________________.2What is the parity or stock equivalent value of the convertible? _______________.3)How many shares would you sell to hedge your equity price risk? ________________4) What other risks does a CB holder have and how can they be hedged.5)What is the annual cash flow if you bought and financed via repo one bond and sold the shares short earning a credit interest rate, assuming no dividend is paid on the stock? ______________.6) What is the bond premium over the stock equivalent value? _____________
4. Assume a CLO sponsor buys 20 loans of $10 million each with a weighted average annual coupon of 6% for PAR and that all the loans mature in exactly 5 years. Assume that the sponsor puts up equity of 10% and issues AAA debt with an annual coupon of 4% for $200 million face value at PAR that matures in 5 years. 1) What is the annual ROE for the sponsor assuming no defaults? ____________.2) What is the holding period return for the five years for the equity investor assuming one default? _______________.3) What is the yield to maturity on the AAA debt assuming one loan immediately defaults with no recovery value? ____________.
5. An August CDD weather option is offered on the cumulative monthly CDD at an Atlanta weather station. An investor has a long call with a strike price of 375 and a short call with a strike price of 400. The payment is $10,000 per degree day. What is the maximum payoff? _____________.