FINANCE-.Compare and contrast the characteristics of contango, backwardation

QUESTION

1.Compare
and contrast the characteristics of contango, backwardation, normal contango,
and normal backwardation markets.

2.Use the following
data from January 31 of a particular year for a group of March 480 options on
futures contracts to answer parts A through G:

Futures Price: 483.10
Expiration: March 13
Risk-Free Rate: 0.0284% (simple)
Call Price: 6.95
Put Price: 5.25

A. What is the intrinsic value of the call?
B. What is the time value of the call?
C. What is the lower bound of the call?
D. What is the intrinsic value of the put?
E. What is the time value of the put?
F. What is the lower bound of the put?
G. Determine whether put-call parity holds.

3.On
July 5, a stock index futures contract was at 394.85. The index was at
392.54, the risk-free rate was 2.83%, the dividend yield was 2.08%, and the
contract expired on September 20. Determine whether an arbitrage
opportunity was available and explain what transactions were executed.

4.Explain
how to determine whether to buy or sell futures when hedging. What are
the three easy approaches to resolve the determination?

5.During
the first six months of the year, yields on long-term government debt have
fallen about 100 basis points. You believe that the decline in rates s
over, and you are interested in speculating on a rise in rates. You are,
however, unwilling to assume much risk, so you decide to do an intramarket
spread. Use the following information to construct a T-bond futures
spread on July 15 and determine the profit when the position is closed on
November 15.

July
15
December Futures Price: 76 9/32
March Futures Price: 75 9/32

November 15
December Futures Price: 79 13/32
March Futures Price: 78 9/32

6.Consider
a $30MM notional amount interest rate swap with a fixed rate of 7%, paid
quarterly on the basis of 90 days in the quarter and 360 days in the year.
The first floating payment is set at 7.2%. Calculate the first net
payment and identify which party, the party paying fixed or the party paying
floating, pays.

7.Consider
a currency swap for $10MM and Swiss Franc 15MM. One party pays dollars at
a fixed rate of 9% and the other pays Swiss Francs at a fixed rate of 8%.
The payments are made semiannually based on the exact day count and 360
days in a year. The current period has 181 days. Calculate the next
payment each party makes.

8.Explain
how a forward swap is like a swaption and how it is different.

ANSWER:

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