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    FIN 425 Global Financial Risk Management - Sample Exam II

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    Ibrahim Khatatbeh
    This document contains a sample exam for a global financial risk management course. It covers topics like interest rate futures contracts, bond portfolio immunization, currency swaps, and option pricing. The exam has 6 questions testing understanding of these concepts through calculations and explaining hedging strategies. It asks students to discuss bond portfolio duration changes from yield curve shifts, construct currency swaps, and analyze arbitrage opportunities between option prices.

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    FIN 425 Global Financial Risk Management - Sample Exam II

    Uploaded by

    Ibrahim Khatatbeh
    47 views2 pages
    This document contains a sample exam for a global financial risk management course. It covers topics like interest rate futures contracts, bond portfolio immunization, currency swaps, and option pricing. The exam has 6 questions testing understanding of these concepts through calculations and explaining hedging strategies. It asks students to discuss bond portfolio duration changes from yield curve shifts, construct currency swaps, and analyze arbitrage opportunities between option prices.

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    riskmgt.0.fin425.sample.exam2

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    This document contains a sample exam for a global financial risk management course. It covers topics like interest rate futures contracts, bond portfolio immunization, currency swaps, and option pricing. The exam has 6 questions testing understanding of these concepts through calculations and explaining hedging strategies. It asks students to discuss bond portfolio duration changes from yield curve shifts, construct currency swaps, and analyze arbitrage opportunities between option prices.

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    © All Rights Reserved
    Download as PDF, TXT or read online from Scribd
    Download as pdf or txt
    47 views2 pages

    FIN 425 Global Financial Risk Management - Sample Exam II

    Uploaded by

    Ibrahim Khatatbeh
    This document contains a sample exam for a global financial risk management course. It covers topics like interest rate futures contracts, bond portfolio immunization, currency swaps, and option pricing. The exam has 6 questions testing understanding of these concepts through calculations and explaining hedging strategies. It asks students to discuss bond portfolio duration changes from yield curve shifts, construct currency swaps, and analyze arbitrage opportunities between option prices.

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    FIN 425 Global Financial Risk Management – Sample Exam II

    Professor Koch
    Covers: Hull, Chapters 6-8,10.
    Answer all questions. Points possible appear in the margin beside each question.

    1. (5) A. Briefly describe the T.Bill futures contract.

    (5) B. Briefly describe the Eurodollar futures contract, how its price is quoted,
    and how it is different from the T.Bill futures contract.

    2. Suppose you manage a bond portfolio worth $50,000,000. It’s duration is 14 years.

    (5) A. Discuss the expected change in the value of your bond portfolio if the yield curve
    experiences an upward parallel shift of 20 basis points (0.2% or .002).

    (5) B. A T. Bond futures contract that expires in 2 months currently has a futures price of 91-12
    ($91,375), and the cheapest-to-deliver bond currently has a duration of 5.5 years. How would
    you immunize the portfolio against changes in interest rates over the following two months?

    (5) C. How would you change the duration of your bond portfolio to 7 years?

    (5) D. Discuss the complications specific to the hedging problem in B. and C. above,
    that make this hedge less effective.

    3. Given the spot exchange rate is S = 2 $/£, consider the following quotes for firms A and B:
    U.K. £ loan U.S. $ loan
    U.K. Company A 11.0% 8.0%
    U.S. Company B 10.5% 7.0%

    Company A wants to borrow 20,000,000 U.S.$, while B wants to borrow 10,000,000 U.K.£.

    (5) A. Given these quotes, describe the margin that could be captured in a currency SWAP.
    Discuss the economic reasons that this margin
    is often available to be shared with a currency SWAP.

    (10) B. Design a currency SWAP that gives the bank 10 basis points
    and splits the remaining margin between Companies A and B.

    (5) C. Explain (briefly) how you would value a different SWAP that is
    the exchange of a floating rate in one currency for a fixed rate in another currency.

    1
    4. A. Consider an exchange-traded put option contract
    to sell 100 shares with strike price X = $40.
    Explain how the terms of the contract will change when there is:
    (2) (i) a 10% stock dividend;
    (2) (ii) a 10% cash dividend;
    (2) (iii) a 5-for-4 stock split;
    (2) (iv) an announcement of increased earnings.

    B. Briefly discuss the margin requirements


    for the following investments:
    (2) (i) purchase of 100 shares of stock;
    (2) (ii) purchase of 2 put options;
    (2) (iii) sale of a naked call;
    (2) (iv) writing a covered call.

    (4) C. Is a European option always worth at least as much as its intrinsic value? Explain.

    (5) D. Distinguish between the function of a Floor Broker and that of the
    Order Book Official.

    5. Consider the following two options:


    Call option with strike price X1 = $55; cost -- c = $2.00
    Put option with strike price X2 = $45; cost -- p = $3.00

    A. Suppose you buy two calls with X1 = $55,


    and you buy one put with X2 = $45.
    (10) Present the payoff pattern of this combination.
    Be sure to discuss or show the break-even point(s).

    B. Suppose you sell two calls with X1 = $55,


    and you sell three puts with X2 = $45.
    (10) Present the payoff pattern of this combination.
    Be sure to discuss or show the break-even point(s).

    6. A. Suppose the current stock price is S = $28;


    a one-year European call option with a strike price of X = $30 costs c = $6;
    (10) and the riskfree rate is 10% (thus, Xe-rt = $27.15).
    What is the equilibrium value of a one-year European put on this stock (p)
    with the same exercise price, implied by Put-Call Parity?

    (5) B. If, in addition to the information in A. above, you observe that the put is
    currently selling for p = $6, discuss possible arbitrage opportunities.
    2

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