Provide calculation to the following assignments

Identify the fundamental distinction between a futures contract and an option on a futures contract and explain the difference in the manner that futures and options modify portfolio risk. (10 marks) Maendeleo Industries is concerned about interest rates rising. It needs to borrow in the bond markets three months hence the company believes that an option on treasury bond futures is the best hedging device. Should the company buy a put option or a call option? Explain (3 marks) Presently, the futures contract trades at Sh. 1,000 and 3 month put and call options both involve premiums of 1/2 per cent based on this strike price. During the 3 months, interest rates rise so that the price on a treasury bond futures contract goes to Sh. 950. What is your gain or loss on the option per Sh. 1,000,000 contract? (4 marks) (ill) What would be the outcome if the interest rates fell and the price went to Sh.1,030? (3 marks) (Total: 20 marks)(a) Explain what is meant by the "expectations theory" explanation for the shape of the yield curve. (b) Explain how expectations theory can be modified by both "liquidity preference" and "market segmentation" theories. [6] Short-term, one-year annual effective interest rates are currently 10%; they are expected to be 9% in one year's time, 8% in two years' time, 7% in three years' time and to remain at that level thereafter indefinitely. (a) If bond yields over all terms to maturity are assumed only to reflect expectations of future short-term interest rates, calculate the gross redemption yields from 1-year, 3-year, 5-year and 10-year zero coupon bonds. (b) Draw a rough plot of the yield curve for zero coupon bonds using the data from part (ii)(a). (Graph paper is not required.) (c) Explain why the gross redemption yield curve for coupon paying bonds will slope down with a less steep gradient than the zero coupon bond yield curve. [8]