FINM7405 Semester One Examinations, 2022
Hello, dear friend, you can consult us at any time if you have any questions, add WeChat: daixieit
FINM7405
Semester One Examinations, 2022
When answering all the questions in this exam paper, assume you are the manager of a portfolio of liabilities, similar to the role that you played in the trading game.
Question 1 (10 Marks)
Instrument |
Coupon (p.a.) |
Yield (p.a.) on 15/06/2004 |
Yield (p.a.) on 15/09/2004 |
Yield (p.a.) on 15/12/2004 |
CP3M |
0.00% |
5.52% |
5.78% |
5.57% |
DB05 |
5.70% |
5.55% |
5.89% |
5.57% |
DB07 |
5.75% |
5.75% |
5.99% |
5.79% |
DB09 |
5.79% |
5.79% |
6.02% |
5.83% |
DB14 |
5.87% |
6.10% |
6.13% |
5.90% |
Table 1 shows the coupon rates of the instruments available in the game as well as their annual yields on different dates. Coupons for all the bonds are paid semi- annually, in March and September. All the bonds have a face value of $1mil, respectively, and they mature in the month of March (e.g. DB09 matures in March 2009).
Required:
a) What is the annualized cost of funds for CP3M for the quarter which ends in September 2004? No calculation is required. [2 marks]
b) What is the annualized cost of funds for DB07 for the quarter which ends in September 2004? [4 marks]
c) What is the annualized cost of funds for DB07 for the quarter which ends in December 2004? [4 marks]
Question 2 (6 Marks)
Table 2
Today is 15th June 2004. Table 2 is extracted from today’s rates sheet. Your team has the responsibility of managing various commodity and foreign exchange risks on behalf of several Australian clients and has adopted an active management of these risks. One client (QEPA) needs to sell 5,000 tonnes of USD priced copper on 15th December 2004. Another client (LG) needs to sell Euro 5mil on 15th March 2005. Assume you have received economic advice suggesting that copper price will fall, USD will depreciate and Euro will appreciate on their respective delivery date.
Required:
Show your hedging strategy today for the copper price risk, USD/AUD exchange rate risk and Euro/AUD exchange rate risk by filling in an appropriate number of deal slips given on next page (i.e. depending on your strategy, you can fill in zero, one, two or more deal slips). Simply fill in the deal slip(s), no explanation is required.
You must draw the deal slip(s) on your answer sheet, and clearly label all the items (e.g. transaction date, maturity date, buy or sell, units, etc.) [6 marks]
|
Question 3 (10 Marks)
Table 3
Table 3 is the transactions your team have just done today, i.e. 15th June 2004. Assume the coupon on the fixed side of each interest rate swap is 5.75% p.a., and the next coupon date is 15th September 2004. Coupons are paid semi-annually.
Required:
a) Does the IRSDB07 transaction increase or decrease your portfolio duration? Why? [2 marks]
b) Calculate the current net cash flow of IRSDB07. Is it a cash inflow or outflow for your team? Show all working. [4 marks]
c) What is the possible main reason for completing both the IRSDB07 and IRSDB14 transactions, rather than the IRSDB07 transaction only? Clearly explain your answer without doing any calculations. [4 marks]
Question 4 (12 Marks)
Assume you are playing the trading game and you are the manager of a portfolio of liabilities that had a market value of $1.1billion at the start of the current quarter (i.e., on 15th March). Bond coupons (and fixed swap payments) are paid in March and September each year. Today is 14th June 2001, which is the last day of the quarter. The yield on 10-year bonds rose significantly during the current quarter.
Other information:
• At the start of the current quarter (i.e ., on 15th March) you advanced one of your
clients $100mil for five years and the same client (QEPA) requires a further $20mil
tomorrow (the first day of the new quarter). For new advances, the five-year fixed rate was 5.77% on 15th March and will be 6% tomorrow.
• Another client (LG), will make a one-off repayment of $15mil tomorrow and a debt
service payment of $3 .4mil.
• On behalf of LG, tomorrow, you will also enter a forward contract (which settles in three months’ time) to buy $20mil USD (AUD$40mil) that LG needs to pay a
supplier.
• At the start of the current quarter, you bought 500 10-year bond futures contracts
with brokerage of $5 per contract and deposit margin of $1,000 per contract
(assume that the deposit margin has not accrued interest over the quarter). The absolute dollar value of variation margin on the futures contract stands at $700,000 for the quarter.
• At the start of the current quarter, you issued commercial paper with face value of $212,601,014. The face value and coupon of bonds currently on issue is: DB02 ($150mil/5.2%); DB04 ($100mil/5.1%); DB06 ($250mil/5.3%); and DB11 ($226.77mil/5.65%). There are two pay-fixed, receive-floating domestic interest rate swaps on issue with face value and coupon: IRSDB04 ($50mil/5. 1%) and IRSDB11 ($125mil/5.65%). Also on issue is one USD denominated Eurobond (US11) with face value and coupon of $USD36mil/6% and one Euro denominated Eurobond (EUR06) with face value and coupon of EUR58.75mil/5%. Both Eurobonds have been swapped back into domestic CP3M with a face value of AUD165mil.
• Last quarter you made a significant error and raised too much money. As a result, the portfolio cash at bank balance is currently $85mil.
• Assume that there are no other debt service payments other than those mentioned
or implied above. Also, assume an administrative charge of 0.5% per annum.
Required:
a) Calculate the net client cash flows that will occur on the first day of the new quarter (i.e., tomorrow). Clearly show and label all calculations and cash flows. [4 marks]
b) Calculate the portfolio generated cash flows.
Note: The mid 3-month rate from last quarter (for the floating side of swaps) was 5.67% and there were 92 days in the quarter just completed. [6 marks]
c) Calculate the net funding or investment amount. Clearly state whether the amount requires a funding or an investment. [2 marks]
Question 5 (12 Marks)
Assume today is 15th September 2005. Coupons are paid semi-annually, in March and September. The following rates/prices are available.
Instrument |
Coupon |
Rate/Price |
DB07 |
5.75% |
5.70% |
IRSDB07 |
5.75% |
6.10% |
FUT3YR |
6.00% |
94.5 |
Required:
a) Assume a face value of $1mil, calculate today’s modified duration of DB07. Clearly show all your workings. Without correct workings, even if the final answer was correct, no marks would be allocated. [4 marks]
b) Assume a face value of $1mil, calculate today’s modified duration of IRSDBDB07. Clearly show all your workings. Without correct workings, even if the final answer was correct, no marks would be allocated. [3 marks]
c) Assume a face value of $1mil, calculate today’s modified duration of FUT3YR. Clearly show all your workings. Without correct workings, even if the final answer was correct, no marks would be allocated. [5 marks]
2022-10-29