Q.1 Mr. A has Rs.100k to invest in market.

He is willing to buy 1000 shares of UBL but his broker

recommended that if he will buy in future so that he can buy 5000 shares at 20% initial margin as current
UBL rate in future is Rs.100. He accepted his advised but broker informed him that he will be called for
margin if margin comes below 12% (Maintenance margin). What happened to losses and margins if prices
come down to following levels:

Price

Day 1 Rs.102

Day 2 Rs.104

Day 3 Rs.98

Day 4 Rs.94

Day 5 Rs.90

Day 6 Rs.85

Required: a) Prepare a table showing margin % on different days plus whether margin below or above
maintenance level and margin call should be given or not on any day?

b) what will be the portfolio value when first margin call will be given?

Q.2 Mr. Javed bought 50000 shares of HUMNL at Rs.10 per share in future by giving broker just Rs.100000
and he is expecting that price will go upto Rs.15 per share in a month time till the end of contract.
However, he does not know that when he may got a call from broker for margin. He wants your advice
that what will be the per share price or total portfolio value when he will get margin call if maintenance
margin is 8%.

Q.3 Lucky Cement shares (LUCK) is currently trading in spot market at Rs.400 and its one month future is
trading at Rs.410. Trader is advising its client to buy via future counter at Rs.410. You need to recommend
clients whether current future price is the right price to buy if risk free rate is 12%p.a.?

Q.4 You are being offered a share of company whose spot price is Rs.30 and someone is offering personally
to you to buy at certain price at three month forward, as seller is not able to find any buyer in market due
to crises in market. What should be the right price for buyer and seller if risk free rate is 18%?

Normal Asset class (or Zero Coupon Bond)

Q.5 Given as asset priced at 130 and a risk free annual rate is 4%. The one year forward price would be?

And what would be the value at the time of initiation?

Q.6 Consider a 3-Month forward contract on a Zero Coupon bond with a face value of 1000 that is
currently quoted at 500 and suppose that the annual risk free rate is 6%. Determine the price of the
forward contract under the No arbitrage principal? What is value of forward contract at the time of
initiation?

Q.7 What would be the value of contract if bond is quoted at 510 after one month in previous question
and risk free rate will remain the same?

Equity Forward Contract

Q.8 Calculate the no arbitrage forward price for 100 day forward on a stock that is currently priced at
30 and is expected to pay a dividend of 0.40 in 15 days, 0.40 in 85 days and 0.5 in 175 days. The annual
risk free rate is 5% and yield curve is flat.

Q.9 In previous example, stock is trading at 36 after 60 days, Calculate the value of equity of forward
contract on the stock to the long position, assuming the risk free rate is 5%.

Q.10 A stock is currently priced at 30 and is expected to pay a dividend at 0.30 in 20 days and 65 days
from now. What will be the forward contract price for 60 days if risk free rate is 5%?

Q.11 After 37 days, the stock in previous question is priced at 21 and the risk free rate is still 5%. What is
the value of the forward contract on the stock to the short position?

Q.12 A portfolio manager owns Macrogow Inc which is currently trading at 35 per share. She plans to sell
the stock in 120 days. But is concerned about a possible price decline. She decides to take a short position
in 120 days forward contract on the stock. The stock will pay 0.50 per share dividend in 35 days and 0.50
again in 125 days. The risk free rate is 4%. What will be the value of trader’s position in the forward
contract in 45 days assuming in 45 days the stock price is 27.50 and risk free rate has not changed?

Fixed Income Forward Contracts-Bonds with Coupon

Q.13 Calculate the price of a forward contract on a 7% U.S. Treasury bond with a spot price of 1050
(including accrued interest) that has just paid an coupon and will make another coupon payment in 182
days. The annual risk free rate is 6%?

Q.14 After 100 days, the value of bond in the previous example is 1090. Calculate the value of forward
contract on the bond to the long position assuming the risk free rate is 6%?

Interest rate forwards-FRA

Q.15 How the following Forward Rate Agreements will be written in FRA Style?

a) 6 months loan in 2 months

b) 1 month loan in 2 months

c) 2 months loan in 3 months

d) 3 months loan in 2 months

Q.16 A company needs money Rs.1mn in 2 months for 3 months. Company is expecting surge in interest
rates and for that reason CFO contacted to bank for Forward rate agreement. Current KIBOR rate is 6%
but bank is offering 6.5% as a forward rate for our loan requirment. CFO accepted bank offer for future
borrowing. At the time of borrowing, KIBOR Reached at 8%. CFO contacted other bank for borrowing and
borrowed 1mn at KIBOR 8%. How much will be paid and by which party when FRA will be settled? Assume
CFO borrowed from other bank at 6% as KIBOR fall to 6% at the time of borrowing then repeat the
requirement with this case?

Q.17 A company needs Rs.5mn in 3 months’ time for 6 months. The company can hedge its exposure the
risk of rise in interest rates by buying 3x9 FRA. Bank is offering 3x9 are 5.40%-5.36%. Company is fixing
rate with offering FRA Bank. Suppose at the end of 3 months, KIBOR is 6.25%. How much amount will be
settled by bank at the time of FRA expiration? Suppose at the end of 3 months, KIBOR is 4.75%, how much
amount will be settled by bank at the time of FRA Expiration?

Q.18 A Company has forecasted that due to an expected cash shortage, it will need to borrow $20mn for
3 months in 2 months time.

A bank quotes the following rates for FRAs:

2x3 3.61-3.59

2x5 3.67-3.63

3x5 3.68-3.65

Required:

What would be the FRA agreement with the bank and what rate would apply to the agreement?

If the company can borrow at LIBOR+50bps, what will be the effective rate of borrowing for the three
months if US Dollar LIBOR is 4.5% at the start of the notional interest period for the FRA?

Q.19 Compute the amount that must be repaid on a $1mn loan for 30 days if 30 day LIBOR is quoted at
6%?

Q.20 Calculate the price of FRA 1 x 4 means 90 days loan in 30 days from now. The current 30 days LIBOR
is 4% and 120 day LIBOR is 5%?

Q.21 Assume in previous question, amount is required $1mn for 90 days and rate has increased to 6% at
the time of FRA expiration which is above than FRA Rate (5.32%). Calculate the value of FRA at maturity,
which is equal to the cash payment at settlement.

Q.22 After 10 days of FRA Initiation in previous question, Find the value of FRA (Valuation at 110TH day) if
110 day LIBOR is 5.9% and 20 day LIBOR is 5.7%.
Currency Forward-Pricing and Valuation

Q.23 If risk free rate are 6% in the US and 8% in Mexico. The current Spot exchange rate is $0.0845 per
Mexican Peso. Calculate the forward exchange rate for 180 day forward contract?

Q.24 The current spot exchange rate is $0.06757 per South African Rand (ZAR). Suppose that the risk-free
rates are 4% in the United States and 6% in South Africa. The arbitrage-free forward exchange rate for a
90-day forward contract using assuming a 365 days year?

Q.25 An institutional forex trader bought A$500,000 against the USD at a price
of F0($/A$)=$0.76F0($/A$)=$0.76 at time 0. Suppose that there are four months to expiration and the
forward price is Ft($/A$)=$0.70Ft($/A$)=$0.70

The USD interest rate is 1.5%, while the AUD interest rate is 1%.

What is the value of Long Position?

Q.26 David entered into a 4 month contract to buy 10mn Euro at price of $1.112 per euro. On month later,
the three month forward price $1.109 per euro. The USD Interest rate is 0.30% and euro interest rate is
0.40% Calculate the value of forward position?

Q.27 If risk free rate is 2% in USA and 10% in Pakistan. The current spot exchange rate is Rs.150 per USD
(PKR150/USD). Calculate the forward exchange rate for 90 days?

Q.28 Mr. A did contract with bank for 90 days at the rate calculated in previous question as he wants to
import of goods for $1mn, so he did contract for the same amount. However, after 30 days rate forward
rate reached at 152, calculate the value of contract? Assume after 30 days, spot price reached at 154,
calculate the value of contract (forward price after one month is not available)?

CASE I

James Walker is the Chief Financial Officer for Lothar Corporation, a U.S. mining
company that specializes in worldwide exploration for and excavation of precious
metals. Lothar Corporation generally tries to maintain a debt-to-capital ratio of
approximately 45% and has successfully done so for the past seven years. Due to
the time lag between the discovery of an extractable vein of metal and the eventual
sale of the excavated material, the company frequently must issue short-term debt
to fund its operations. Issuing these one to six month notes sometimes pushes
Lothar's debt to capital ratio above their long-term target, but the cash provided
from the short-term financing is necessary to complete the majority of the
company's mining projects.

Walker has estimated that extraction of silver deposits in southern Australia has
eight months until project completion. However, funding for the project will run
out in approximately six months. In order to cover the funding gap, Walker will have
to issue short-term notes with a principal value of $1,275,000 at an unknown future
interest rate. To mitigate the interest rate uncertainty, Walker has decided to enter
into a forward rate agreement (FRA) based on LIBOR which currently has a term
structure as shown in Exhibit 1.

Exhibit 1 Exhibit 2

LIBOR rates (t = 90)

LIBOR rates (t = 0)
LIBOR
LIBOR 90-day 5.12%
150-day 5.96%
90-day 4.28%
210-day 6.03%
180-day 4.52%
300-day 6.41%
240-day 5.11%

360-day 5.92%

Three months after establishing the position in the forward rate agreement, LIBOR
interest rates have shifted causing the value of Lothar's FRA position to change as
well. The new LIBOR term structure is shown in Exhibit 2.

While Walker is estimating the change in the value of the original FRA position, he
receives a memo from the Chief Operating Officer of Lothar Corporation, Maria
Steiner, informing him of a major delay in one of the company's South African
mining projects. In the memo, Steiner states the following:

"As usual, the project delay will require a short-term loan to cover funding shortage
that will accompany the extra time until project completion. I have estimated that
in 210 days, we will require a 90-day project loan in the amount of $2,350,000. I
would like you to establish another FRA position, this time with a contract rate of
6.95%."
1) Given data in Exhibit 1, Find out the closest to the price of the FRA on the date
of the contract’s inception?

2) Find out the value of the value of the forward rate of agreement three months
after the inception of the contract (from Walker’s perspective)? For this question
only, assume that the interest rate at inception was 6.0%.

CASE II
Q1. Jonathan Adams, CFA, is doing some scenario analysis on forward contracts. The
process involves pricing the forward contracts and then estimating their values based
on likely scenarios provided by the firm's forecasting and strategy departments. The
forward contracts with which Adams is most concerned are those on fixed income
securities, interest rates, and currencies.
The first contract he needs to price is a 270-day forward on a $100 par Treasury bond
with ten years remaining to maturity. The bond has a 5% coupon rate, has just made a
coupon payment, and will make its next two coupon payments in 182 days and in 365
days. It is currently selling for 98.25. The risk-free rate is 4%. Adams is also analyzing
forward rate agreements (FRAs).
The LIBOR spot curve is as follows:

Finally, Adams wants to price a currency forward on euros and Swiss francs. The euro
spot rate is $1.1854 and the Swiss franc spot rate is $1.0210. The dollar risk-free rate is
3%, the euro risk-free rate is 4%, and the Swiss risk-free rate is 2%.

Required:
a) Find out the no-arbitrage price for the forward contract on the Treasury bond.
b) If the Treasury bond price decreases to 98.11 (including accrued interest) over the next 60 days,
the value of a short position in 270-day forward contract on $10 million bond will be?
c) How many of the following terms are correct in the calculation of the FRA price:
0.0352, 0.0332, 60/360, 90/360?
d) After 30 days, Adams wants to value a $10 million short position in 2x 5 FRA. The 90-day
forward rate in 30 days is now 4.14%, and the original price of the FRA was 4.30%. 120-day
LIBOR has changed to 3.92%. The current value of the $10 million FRA to the short position
under this scenario is?
e) The no-arbitrage price for a 1-year forward contract on euros is?
f) If the Swiss franc is trading at a 1-year forward premium of $0.0301, the most appropriate
arbitrage transaction would entail?

More Questions on Currency

Q.1 Convert the following quotes into indirect quotes

a) PkR210/USD b) $0.5/£ c) Euro0.80/USD d) $0.5/Saudi Riyal

Q.2 Convert the following Exchange rates into indirect quotes:

BID Offer
a) $ 200 PkR 202 PkR
b) £ $0.56 $0.60
c) PESO $0.0081 $0.0083
d) SAR $0.3200 $0.3250

Q.3 Exchange rate PkR/$ 200.50-------200.70

a) How much buying of $1000 will cost us in PkR?

b) How much do we get in PkR by selling $1000?

c) How much buying of PkR100000 will cost us in dollars?

d) How much do we get dollars by selling PkR100000?

Q.3 You need to identify in following cases which currency appreciate or depreciate vs another currency:

Case I

Bid Offer

Day 1 $0.50/£ $0.52/£

Day 3 $0.56/£ $0.59/£

Day 5 $0.61/£ $0.65/£

Case II

Bid Offer

Day 1 £0.75/Euro £0.76/Euro

Day 3 £0.70/Euro £0.72/Euro

Day 5 £0.65/Euro £0.67/Euro

Q.4 A Pakistani importer wants 1mn dollar after 3 months. He contacted banker and he give him rates

Bid Offer

Spot PkR 180 182

3M Forward PkR 200 202

He is worried about fall in rupee against dollar that would increase its cost of production and will hurt
profitability of its company. He wants to hedge its currency risk and booked forward rate with banker.
After 3 months dollar spot rate he found:

Spot PkR 192 194

Calculate the actual cost of Importer and what would be the cost if he couldn’t go for hedging.

Q 5 A US Exporter sells one product to Europe on Cost plus basis

The selling price is based on a US Price of $18 to cover cost and profit margin. The current exchange rate
is Euro1.34/$.

What would be the effect on the exporters business if rate reached at Euro 1.41/$.?
Q.6 On 1 Jan a UK Firm enters into a contract to buy a piece of plant form the US for $250000. The invoice
is to be settled on March 31. The exchange rate on Jan 1st is $1.5/£. However, by 31st march, the pound
may have

i) Strengthen to $1.65/£

ii) Depreciated to $1.35/£

Explain the risk faced by the UK Firm