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Introduction to Derivative Securities 4/6 points (66%)


Quiz, 6 questions

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 Required to pass: 80% or higher
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1.
Term structure of interest rates and swap valuation

Suppose the current term structure of interest rates, assuming annual


compounding, is as follows:

s1 s2 s3 s4 s5 s6

7.0% 7.3% 7.7% 8.1% 8.4% 8.8%

What is the discount rate d(0, 4)? (Recall that interest rates are always
quoted on an annual basis unless

stated otherwise.)

Please submit your answer rounded to three decimal places. So for example,
if your answer is 0.4567 then you should submit an answer of 0.457.

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2.

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Swap Rates

IntroductionSuppose
to Derivative
a 6-year swapSecurities
with a notional principal of $10 million is being 4/6 points (66%)
Quiz, 6 questions
con gured. What is the xed rate of interest that will make the value

of the swap equal to zero. (You should use the term structure of interest
rates from Question 1.)

Please submit your answer as a percentage rounded to two decimal places.


So for example, if your answer is 4.567% or equivalently 0.04567, then you
should submit an answer of 4.57.

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 points

3.
Hedging using futures

Suppose a farmer is expecting that her crop of oranges will be ready for

harvest and sale as 150, 000 pounds of orange juice in 3

months time. Suppose each orange juice futures contract is for 15, 000

pounds of orange juice, and the current futures price is F0 = 118.65 cents-
per-pound.

Assuming that the farmer has enough cash liquidity to fund

any margin calls, what is the risk-free price that she can guarantee herself.

Please submit your answer in cents-per-pound rounded to two decimal


places. So for example, if your answer is 123.456, then you should submit
an answer of 123.47.

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4.

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Minimum variance hedge

IntroductionSuppose
to Derivative Securities
a farmer is expecting that her crop of grapefruit will be ready for 4/6 points (66%)
Quiz, 6 questions
harvest and sale as 150, 000 pounds of grapefruit juice in 3

months time. She would like to use futures to hedge her risk but
unfortunately there

are no futures contracts on grapefruit juice. Instead she will use orange juice
futures.

Suppose each orange juice futures contract is for 15, 000

pounds of orange juice and the current futures price is F0 = 118.65 cents-
per-pound.

The volatility, i.e. the standard deviation, of the prices of

orange juice and grape fruit juice is 20% and 25%, respectively,

and the correlation coe cient is 0.7. What is the approximate number

of contracts she should purchase to minimize the variance of her payo ?

Please submit your answer rounded to the nearest integer. So for example,
if your calculations result in 10.78 contracts you should submit an answer of
11.

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 points

5.
Call Options

Consider a 1-period binomial model with R = 1.02 , S0 = 100 ,

u = 1/d = 1.05 . Compute the value of a European call option on the stock

with strike K = 102 . The stock does not pay dividends.

Please submit your answer rounded to two decimal places. So for example,
if your answer is 3.4567 then you should submit an answer of 3.46.

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Introduction to Derivative Securities 4/6 points (66%)
6.
Quiz, 6 questions
Call Options II

When you construct the replicating portfolio for the option in the previous
question how many dollars do you need to invest in the cash account?

Please submit your answer rounded to three decimal places. So for example,
if your answer is −43.4567 then you should submit an answer of −43.457.

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