Questions 1

The yield curve is flat at 6% per annum. What is the value of a Forward Rate Agreement where the holder receives interest at the rate of 8% per annum for a six-month period on a principal of $1,000 starting in two years?All rates are compounded semi-annually. Explain your answer. (3 marks)

Questions 2

(1)A trader has a portfolio worth $5 million that mirrors the performance of a stock index. The stock index is currently 1,250. Futures contracts trade on the index with one contract being on 250 times the index. To remove market risk from the portfolio the trader should short or long in the forward or futures market? (2 marks)

(b)A company enters into a short futures contract to sell 50,000 units of a commodity for 70 cents per unit. The initial margin is $4,000 and the maintenance margin is $3,000. What is the futures price per unit above which there will be a margin call? (3 marks)

Question 3

In which of the following cases is an asset NOT considered constructively sold? Explain your reasoning. (2 marks)

A. The owner shorts the asset

B. The owner buys an in-the-money put option on the asset

C. The owner shorts a forward contract on the asset.

D. The owner shorts a futures contract on the stock