The attachment is Financial markets coursework, including 11 questions

Question 1 The policy-making committee of Bank ABC recently used reports from its securities analysts to develop the following efficient portfolios. Portfolio 1 2 3 4 5 Expected rate of return 8% 10% 15% 20% 25% Standard deviation 5% 6% 8% 13% 18% i. If the risk free rate of interest is 3% which portfolio is best? ii. Assume that the policy-making committee would like to earn an expected rate of return of 10% with a standard deviation of 4%, is this possible? iii. If a standard deviation of 12% was acceptable to the investment committee, what would be the expected return and how could it best be achieved? iv. What is the expected rate of return on a combined portfolio made up of all the above 5 portfolios with an equal weighting given to each portfolio? Question 2 A Treasury bond with 100 maturity value has a 8 annual coupon and 5 years left to maturity. i. What price will the bond sell for assuming that the 5-year yield to maturity in the market is 7%.(Show your calculations) ii. What would be your answer to part (i) if the 5-year yield to maturity in the market is 9%.(Show your calculations) iii. What does your answer to parts (i) and (ii) tell you about the relationship of bond prices and changes in bond yields?(2 marks) Question 3 . i. Calculate the Macaulay Duration for an 5 annual coupon bond with 5 years left to maturity if the bond's yield to maturity is 6% and the face value of the bond is 100. (Show your calculations) ii. What is the modified Duration of the bond? iii. If 5 year yield to maturity were to suddenly to increase from 6% to 6.5% and the bond in problem (i) was selling for 95.79 at 6% yield, what would you expect the bond price to be after the yield increases to 6.5% ? Question 4 You have following investments in securities A, B and C. Security return A B C Amount Invested 20,000 15,000 15,000 Beta 0.8 1.2 2.0 Expected 1 Year Return 12% 18% 24% The current risk free rate of interest is 8% and you have heard that analysts are expecting a 15% return on the market portfolio over the next year. Based on your expectations for the 1-year returns of each of the securities is your portfolio under priced, overpriced or correctly priced? (show your workings and explain your reasoning) Question 5 Assume that the following data represent all risky securities in the economy. Security Class A B C D Total Value (millions) 40m 40m 20m 50m 150m Standard deviation 10.0% 15.0% 20.0% 30.0% Correlation Coefficient Matrix A B C D 1.0 0 0 0 0 1.0 0 0 0 0 1.0 0 i. What is the market portfolio ie what percentage of each security must be invested to achieve the market portfolio? What is the standard deviation of the market portfolio? ii. If the risk free rate of return is 5% and the expected return on the market portfolio is 15%, what are the Capital Market Line and Security Market Line equations? iii. A pension fund that you are advising wishes to have an expected rate of return of 12%. How should the fund invest to obtain this? What would be the standard deviation and the beta of the pension fund's portfolio? Question 6 You are an equity analyst working for an investment bank. You are analysing Company ABC shares. The last year dividend (Do) was 20 pence. You are predicting 15% dividend growth for next 3 years and 8 % for the following 2 years, and thereafter dividend growth is assumed to slow for the foreseeable future to 5%. The required rate of return on equity is deemed to be 10%. i. Calculate the fair value price of the share. (show your workings) ii. What is the fair value of the share at the end of year 5? (show your workings) 0 0 0 1.0 Question 7 You are given the following data on the 3-month dollar interest rate futures contract. The contract has a notional size of $1 million. September 2015 Sterling futures contract 94.5 i. Explain what the sale of such a contract implies. ii. If you think 3-month interest rates in September 2015 will be 6.5% would you buy or sell the contract? Explain your reasoning and the profits you can expect if you are correct. iii. Briefly explain how a Corporate Treasurer who is looking to borrow $1 million of funds for 3 months from September 2015 might use the above contract to hedge interest rate risk. Question 8 You are given the following information about the stock of Company A: Share price $50 risk free rate of interest is 10%, time to expiration is 3 months, annualised standard deviation is 0.6 and exercise price is $55. i. Calculate the appropriate call value of the stock according to the BlackScholes option pricing formula. (Show your workings in full) ii. Calculate an appropriate put premium. (Show your workings in full) Question 9 (a) It is February 1 2015, the 3 month (91 days) $LIBOR spot interest rate is 5.5% and the 6 month (182 days) $LIBOR spot interest is 5%. Calculate the appropriate price of the May 2 (91 days from 1 February) $LIBOR interest rate futures contract. (b) Explain the rationale behind your result given that the contract size is for $1 million. Question 10 . The dollar/pound ($/) exchange rate is currently $1.95/1 and the following options and futures prices exist for September 2015. September 2015 Futures (contract size 50,000) $1.90/1 September 2015 Options The underlying contract is to buy/sell 50,000 at $1.90/1 Strike price $1.90/1 call option premium $0.08 put option premium $0.03 You are a speculator and expect the spot rate on expiry in September 2015 to be $2.10/1. Discuss the relative merits of using the futures or options contracts to speculate on your predicted currency movement. In your answer consider a range of possible future spot rates for sterling and the resulting profits/losses in both pounds and dollar equivalents. Question 11 You are given the following data on call and put premiums in pence per share for Company ABC shares which are currently priced in the market at 390 pence. Each contract refers to 1000 to shares. Strike Prices 400 pence 450 pence Call premiums in pence September 55 30 Put premiums in pence September 35 100 i. You expect the share price to fall to 300 pence discuss a speculative strategy and the profits/losses at a range of different prices for the underlying share in September. ii. You own 1000 shares in Company ABC and fear that the share price might fall to 300 pence. Discuss a hedging strategy using the above contracts and the approximate value of your net hedged position at a range of different prices for the underlying share in September