Question 6 Note for this question I do not want you just copying my numerical examples from the lecture ! I want you to use your own example and different numbers. 0 (6) Explain with your own numerical example what is meant by a Sovereign Credit Default Swap (CDS). (6 marks) If the perceived risk of a default by Greece falls due to a major credit rating upgrade from CCC to BBB+ what is likely to happen to its quarterly CDS premiums. Explain using your own numerical example. (4 marks) Question 7 The FTSE 100 - cash index is 5,800 while the March 2021 FTSE 100 futures index is 5,700 and the contract value of each index point on the futures contract is 25. You are convinced the cash market will be 6,300 by expiry of the futures contract. You are only prepared to buy or sell one futures contract. You pay 2,000 initial margin on the opening of your position. ) Will you buy or sell a contract in the futures market? (2 marks) c) What is your profit (+)/loss (-) if the futures price on expiry is 5700? (2 marks) (i) What is your profit (+Yloss (-) if the futures price on expiry is 6,300? (2 marks) (iv) Explain what is meant by "variation margin" on the futures contract and discuss at what level of the FTSE future contract you could be expected to pay variation margin payments. (4 marks) Question 6 Note for this question I do not want you just copying my numerical examples from the lecture ! I want you to use your own example and different numbers. 0 (6) Explain with your own numerical example what is meant by a Sovereign Credit Default Swap (CDS). (6 marks) If the perceived risk of a default by Greece falls due to a major credit rating upgrade from CCC to BBB+ what is likely to happen to its quarterly CDS premiums. Explain using your own numerical example. (4 marks) Question 7 The FTSE 100 - cash index is 5,800 while the March 2021 FTSE 100 futures index is 5,700 and the contract value of each index point on the futures contract is 25. You are convinced the cash market will be 6,300 by expiry of the futures contract. You are only prepared to buy or sell one futures contract. You pay 2,000 initial margin on the opening of your position. ) Will you buy or sell a contract in the futures market? (2 marks) c) What is your profit (+)/loss (-) if the futures price on expiry is 5700? (2 marks) (i) What is your profit (+Yloss (-) if the futures price on expiry is 6,300? (2 marks) (iv) Explain what is meant by "variation margin" on the futures contract and discuss at what level of the FTSE future contract you could be expected to pay variation margin payments. (4 marks)
