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# Exam FM/2 Review PowerPoint Presentation, PPT - DocSlides

alida-meadow | 2016-04-22 | General

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Forwards, futures, & swaps. Four ways to purchase a stock. Outright purchase. Receive now. Pay now: . Borrow to pay for the stock. Receive now. Pay later:. Prepaid forward contract. Receive in future. ID: 289082

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Slide1

Exam FM/2 Review

Forwards, futures, & swaps

Slide2Four ways to purchase a stock

Outright purchaseReceive nowPay now: Borrow to pay for the stockReceive nowPay later:Prepaid forward contractReceive in futurePay now: Forward contractReceive in futurePay in future:

Slide3Notes

Cost of carryDifference between interest and dividend ratesCost for you to borrow and buy stock, then hold itImplied repo rate- interest rate used to find forward priceCash and CarryShort a forward contract and buy the assetPays off if forward price is too high

Slide4Futures contracts

Simply a standardized forward contract, sold in exchangesMarked-to-marketChanges in value are settled daily through partiesParties maintain margin accounts to cover these changes

Slide5Swaps

Simply a series of forward contractsPaymentPrepaid- pay nowPostpaid- pay at endLevel annual payments- most commonTypesCommodity, eg. price of cornInterest rateForeign currencyAny of these could be deferred, or start in the future

Slide6Problem 1

The current price of a stock is $84. A one-year forward contract is entered into. It is expected that 4 quarterly dividends of $5 each will be paid on the stock starting 3 months from now. The 4th dividend will be paid one day before expiration of the forward contract. The risk-free interest rate is 6% compounded quarterly. What is the price of a prepaid forward contract?ASM p.612

Answer: $64.73

Slide7Problem 2

A stock index pays dividends continuously at a constant rate of 5% per annum. The current price of one unit of the index is $50. What is the price of a prepaid forward contract for delivery of one of the index in 3 months?ASM p.612

Answer: $49.38

Slide8Problem 3

A stock has a current price of $65. A dividend of $3.25 is expected to be paid in 6 months. The risk-free interest rate is 10% effective per annum. X is the forward price of a one-year forward contact that has the stock as the underlying asset. Determine X.ASM p.612

Answer: $68.09

Slide9Problem 4

Suppose a stock index is currently priced at $1,500, and the 12-month forward price on that index is $1,550. Let the annualized dividend yield on the index be 2%, and let the continuously compounded annual rate of (risk-free) interest be 8%. What would the profit or loss at forward maturity (12 months from now) under a cash-and-carry strategy?ASM p.613

Answer: $42.75 loss

Slide10Problem 5

Take these forward prices for forward contracts of Stock ABC:Years to Exp. Forward Price 1 $100 2 110 3 120Take these spot rates of interest:Term to maturity Spot Rate 1 3.0% 2 3.5 3 3.8X is the level swap price under a 3-year swap contract with the same underlying asset. Determine X.ASM p.630

Answer: $109.56

Slide11Problem 6

Two interest rate forward contracts are available for interest payments due 1 and 2 years from now. The forward interest rates in these contracts are based on a one-year spot rate of 5% and a 2-year spot rate of 5.5%. X is the level swap interest rate in a 2-year interest rate swap contract that is equivalent to the two forward contracts. Determine X.ASM p.630

Answer: 5.49%

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