• +44-190-022-0819 +44-190-022-0819
  • +1-248-268-9041 +1-248-268-9041
  • +61288800241 +61288800241

SEARCH SOLUTION

Search your solution from list of 1000+ questions

04-09-2018

Product code:-Accounts-AW661

 

Swaps and Properties of options

This assignment is intended to provide some practice in calculations involving the use of swap contracts, and understanding the properties and uses of options.

 

1. Finding a Swap Rate from the Term Structure

Suppose that the term structure of interest rates for the next five years is as given in the chart and table below.

 

                                                                                         

 

Use Excel to determine the swap rate for a five-year swap where payments are made every six months.  In order to do this, you should follow the steps given below:

  1. Calculate the continuously compounded forward rates for each six-month period in the five-year term structure.

 

  1. Convert the continuously compounded forward rates to semi-annually compounded rates, and use these to find the floating-rate cash flows to be received at the end of each six-month period.

 

  1. Assume that the fixed-rate cash flow to be paid is a constant percentage of the face value of some notional amount, and assume that all these payments will remain the same throughout the tenor of the swap.

 

  1. Calculate the net cash flow for each payment period, and discount these using the appropriate continuously compounded zero rate.

 

  1. Use “Goal Seek” or “Solver” in Excel to set the initial value of the swap to zero, by changing the swap rate in your spreadsheet.

 

  1. Print a copy of your Excel calculations and attach them to your homework submission.

 

 

2. Probability of Default for a CDS (Problem 23.14)

[Use Excel to set up the example in Tables 23.2 to 23.5.]  Verify that if the CDS spread for the example is 100 basis points then the probability of default in a year (conditional on no earlier default) must be 1.61%.  What is the implied probability of default when the CDS spread is 100 basis points but the recovery rate is 20% instead of 40%?  Finally, use your Excel model to estimate the credit default spread (in basis points) with the same general assumptions as for the example, but with a probability of default of 1.50%, a risk-free interest rate of 4.0% and an expected recovery rate of 35.0%.

 

[Print a copy of your Excel model and attach it to your homework submission.]

 

 

3. Dividends and Stock Splits

A trader has a put option contract to sell 100 shares of a stock for a strike price of $60.  What is the effect on the terms of the contract of:

  1. A $5 dividend being declared
  2. A $5 dividend being paid
  3. A 5-for-2 stock split
  4. A 5% stock dividend being paid.

 

 

4. Margin Requirements

A trader writes five naked put option contracts, with each contract being on 100 shares.  The option price is $10, the time to maturity is six months, and the strike price is $64.

  1. What is the margin requirement if the stock price is $58?
  2. How would the answer to (a) change if the rules for index options applied?
  3. How would the answer to (a) change if the stock price were $70?
  4. How would the answer to (a) change if the trader is buying instead of selling the options?

 

 

5. Put-Call Parity on a Non-Dividend-Paying Stock

The prices of European call and put options on a non-dividend-paying stock with 12 months to maturity, a strike price of $120, and an expiration date in 12 months are $20 and $5, respectively.  The current stock price is $130.  What is the implied risk-free rate?

Download Questions

Product code:-Accounts-AW661

Related Questions in (Accounting)

13-01-2018

Solution: The Journal of Helene Berr and Rue Ordener, Rue Labat 2 evidences that prove the difficulty and destructiveness that the people had to face in those four years. As mentioned by Berr (2009, p.23), in h ...

18-01-2018

Solution: Employee communication highlights the sharing of ideas and information. In this competitive business world, information exchange is essential among employees to develop team performance effectively. m ...

18-01-2018

Solution: As per Section 1 of the Thirteenth year plan describes about China’s two key objectives that will be accomplished if the National People’s Congress or the standing committee of this party passes t ...

18-01-2018

Solution: (Feldman 2005) reference information extraction to be one of the weightiest pre-processing method that escalates the text mining potential significantly. Pre-processing is an essential part in informa ...

18-01-2018

Solution: The pro forma income statement represents a trending statement that includes the probable net income value for the company considering the current growth and decline rates valid throughout the period ...

18-01-2018

Solution: Mode is defined as the value which occurs more frequently in the data set. The mode for non-business is 82 while for business is only 59. P value can be calculated from z table . As per z table p valu ...

18-01-2018

Solution: ABC assumes that there are different activities involved in different processes that cause costs andthe product, services, and customers are reasons for those activities. The UK customer segment is br ...

19-01-2018

Solution: Residual earnings valuation method is used to calculate the intrinsic value of the stock based on the expected residual income of the company in the coming years. The residual income is discounted bac ...