BFW2751: Nancy Lim a financial analyst, is looking for your guidance regarding her new investment portfolio, which is worth $2 million: Derivatives 1 Assignment, MUM, Malaysia

University Monash University Malaysia (MUM)
Subject BFW2751: Derivatives 1

Question 1

Nancy Lim a financial analyst, is looking for your guidance regarding her new investment portfolio, which is worth $2 million. The department intends to invest the amount for a period of three months, starting from July 1st until October 1st. The fixed annual rate for the investment for 3 month period is 5.10%, 4 months is 5.6% and 5 months is 6.7%. In the past months, you were informed about the uncertainty of the floating rate. The investment period day count convention is 92 days and for FRA pricing, the actual/360 convention is used. On 1st July, the FDA predicted a Libor rate of return of 5.30% per annum.

You are required to calculate and identify the highest net interest revenue for the above investment based on the following interest rate hedge instruments,

  1. FRA contracts
  2. Eurodollar Futures contract
  3. Bank Accepted Bills Futures contracts

Question 2

According to a soybean farmer, they do not utilize futures contracts for hedging as their primary concern is not the price of soybeans, but the potential destruction of their entire crop due to weather conditions.

  1. What is your viewpoint regarding this approach?
  2. Do you believe that the farmer should estimate their expected soybean production and utilize hedging to secure a price for the anticipated yield? Under what circumstances is hedging considered preferable?

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Question 3

Julia, a portfolio manager at Dane Investment in the US, took a short position in Swiss franc currency futures. Her position comprises 100,000 contracts with an initial margin of $4,000, a maintenance margin of $2,500, and a contract price of 0.912 USD/CHF.

  1. Assuming a contract size of 1, calculate the balance in Julia’s margin account at the end of the second day if the futures prices were 0.9300 and 0.8928, respectively.
  2. Fill up the table that summarizes the account balance changes.


Question 4

A fund manager has a portfolio worth $50 million with a beta of 0.87. The manager is concerned about the performance of the market over the next two months and plans to use three-month futures contracts on the S&P 500 to hedge the risk. The current level of the index is 1250, one contract is 250 times the index, the risk-free rate is 6% per annum, and the dividend yield on the index is 3% per annum. The current 3-month futures price is 1259.

  1. What position should the fund manager take to eliminate all exposure to the market over the next two months?
  2. Calculate the effect of your strategy on the fund manager’s returns if the level of the market in two months is 1,000. Assume that the one-month futures price is 0.25% higher than the index level at this time.

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