8/10/2019 Assignmnet Gr5 FRM
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Assignment Submission Deadline: 09.00PM Nov 01, 2014
1. At MCX-SX currency futures in US dollar are traded. Today is
12 December and January
futures would expire on 28 January. Spot rate in the exchange
market for dollar is Rs.
45.45. The yields in the T-bills markets of India and USA are
5.90% and 2.40% respectively.
a.
At what price January futures would be traded?
b. What would be the price of February futures if its expiry is
on 24 February?
Ans:
(a) Given S0=45.45, Rd=5.90%, Rf = 2.40%, and t= 47 days (From
12 December to 28
January)
F =S0* e^(rd-rf)t = 45.45* e^(0.059 -0.024)47/365 = 45.6552
(b) For February futures, the time to expiry would be 47+27=74
days. The price of
February futures would be:
F= S0* e^(rd-rf)t = 45.45* e^(0.059 -0.024)74/365 = 45.7736
2. In June an Indian importer buys a machine at US $50, 000.
Payment is due after six
months in December. The spot exchange rate is Rs. 45.5625 while
December futures is
trading at Rs. 46.6500 indicating an appreciation of dollar by
about 2.4% in six months.
The importer feels that dollar will appreciate much more. What
shall he do? Assumefutures contract in rupees are available for
$1,000.
Ans:
Number of contracts bought by importer= (Exposure amount)/
(Value of one
contract)= 50000/1000= 50
Suppose the USD appreciates to 48.5000 and a futures contract
sells for 48.6500
The importer exits the futures contract at 48.6500 and buys
foreign currency in thespot market at the prevailing spot rate.
Cost= 50,000*48.5000= 24,25,000
Sell 50 future contracts booked earlier at 48.6500;
Net gain on futures (48.6500-46.6500)* 50,000= 1,00,000
8/10/2019 Assignmnet Gr5 FRM
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a)
Since there is an expected decline in the market value of the
USD, Multiplex
Ltd should book a 3m-forward contract for its payment with a
short
position(52.5/$) .
b)
Benefits:
3m-forward bid rate: Rs 52.5/$Firm assumed spot rate: Rs
45/$
Gain= (52.5-45)*10 mill= Rs 75 mill
Risk
If the dollar rate goes down to (45-7.5) i.e. Rs 37.5/$, then
the firm would be
at risk of losing money.
c) Cash flow after hedging= 52.5*10 mill= 525 million rupees
4. Explain carefully the relationship between convenience
yieldand cost of carry. Assume that the
risk-free interest rate is 9% per annum with continuous
compounding and that the dividend yield
on a stock index varies throughout the year. In February, May,
August, and November, dividends
are paid at a rate of 5% per annum. In other months, dividends
are paid at a rate of 2% per
annum. Suppose that the value of the index on July 31 is 1,300.
What is the futures price for a
contract deliverable in December 31 of the same year?
Ans:
Total cost of carry= risk free rate+ storage cost rate-
convenience yieldConvenience yield measures the extent to of the
benefits obtained due to physical
ownership or storage of the commodity which the future contracts
owners dont
get.
R= 9/12*5= 3.75%
Q= (5*2/12) + (2*3/12)= 1.33%
F= S*e^(r-q)t= 1300*e^(.0375-.0133)*1= 1300*1.0245= 1331.84
