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Assignment 1

This document outlines an assignment for a business finance course. It contains 6 questions relating to futures markets, forward and futures contracts, weather derivatives, foreign exchange hedging, portfolio performance evaluation, and arbitrage opportunities using forward rate agreements (FRAs). Students are asked to compare the roles of hedgers, arbitrageurs and speculators in futures markets; define futures contracts and compare them to forwards; discuss how weather derivatives can mitigate risk; explore hedging exchange rate risk with forwards and options; evaluate a portfolio manager's claim about performance; and identify any arbitrage opportunities for a bank using borrowing/lending rates and an FRA. The assignment is worth 100 points total and has a due date of February 25

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Fahad Al Zaman
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47 views

Assignment 1

This document outlines an assignment for a business finance course. It contains 6 questions relating to futures markets, forward and futures contracts, weather derivatives, foreign exchange hedging, portfolio performance evaluation, and arbitrage opportunities using forward rate agreements (FRAs). Students are asked to compare the roles of hedgers, arbitrageurs and speculators in futures markets; define futures contracts and compare them to forwards; discuss how weather derivatives can mitigate risk; explore hedging exchange rate risk with forwards and options; evaluate a portfolio manager's claim about performance; and identify any arbitrage opportunities for a bank using borrowing/lending rates and an FRA. The assignment is worth 100 points total and has a due date of February 25

Uploaded by

Fahad Al Zaman
Copyright
© © All Rights Reserved
Available Formats
Download as DOC, PDF, TXT or read online on Scribd
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University of Waterloo

Department of Economics
Econ 372 – Business Finance 2
Assignment 1 (100 points)

Due date: February 25, 2016 by 10:00 PM

Location: Economics Department Drop box located on the 2nd floor of HH

1. Compare and contrast roles of the following participants in futures market. Explain the
difference between these roles and how they benefit the overall market. (30 points)

a. Hedgers

b. Arbitrageurs

c. Speculators

2. Define a futures contract and discuss the similarities and differences between forward and
futures contracts. (10 points)

3. Many businesses have revenue that is sensitive to weather. In cases like these the
businesses could hedge their risk using weather derivatives. Discuss an example of a
weather derivative and how it is used by companies to mitigate risk. (20 points)

4. A US company knows it will have to pay 50 million Yen in three months to a supplier.
The current exchange rate is 0.1500 Dollars per Yen. Discuss how forward and options
contract can be used by the company to hedge its exposure to exchange rate risk. (10
points)

5. A portfolio manager has maintained an actively managed portfolio with a beta of 0.5.
During the last year, the risk free rate was 2.5% and equities performed very poorly
providing a return of -20%. The portfolio manager produced a return of -10% and claims
that in the circumstances it was a good performance. Discuss this claim. (10 points)

6. A bank can borrow or lend at LIBOR. Suppose that the six-month rate is 5% and the
nine-month rate is 6%. The rate that can be locked in for the period between six-months
and nine-months using an FRA is 7%. What arbitrage opportunities are open to the bank?
Assume continuously compounded rates. Define what FRA is in this context. (20 points)

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