Econ 393 Assignment 4

I.I
a. A corporation anticipates it will require a $100 million loan for a 90-day period beginning in 6
months that will be based on 3-month LIBOR rates plus some fixed premium.

The corporation is concerned that rates may rise before the loan is needed and that it will, therefore,
be required to pay higher interest rates. Using Eurodollar futures contracts what is the hedge ratio?
Hint(ED futures contract is for $1,000,000)

I.II
1.
It is November 1,2014. Youre a grain producer who plans to borrow approximately
$1,000,000.00 next March 14, 2015 to finance seed, fertilizer, and operations for spring planting. You
intend to repay the loan 3 months later on June 14,2015

Your bank agrees to a loan rate of 3M LIBOR plus 100 basis points (3M LIBOR + 1 percent).

That is, your bank sets the interest rate to 3M LIBOR on the day you take out the loan ( March 14,2015)
adding 1 percent to the LIBOR baseline.
a. Find what 1 ED futures equals, what the hedge ratio is and if your hedge is short or long
(Hint: our in class example was gaining interest on a deposit, here we are taking out a loan)
b. Suppose that when you arrange the loan and then hedge its forward interest rate exposure in
November 15 2014, find the March 2015 ED futures price on November 14,2014
http://www.cmegroup.com/trading/interest-rates/stir/eurodollar.html
c. Find the 3M forward LIBOR rate from the ED futures price in b.
(Hint this is in % per annum therefore you must bring to decimal, i.e. 0.35% =0.0035)
d. If the forward rate increase what happens to the ED futures price?
e. Suppose that ED futures for March 2015 were to expire on March 14 at a price 99.235, find
the3M forward LIBOR rate.
f. Did the ED futures price increase or decrease? By how much, by how many bp?
Hint( 1bp = 0.01)

2 . Fill in the figure to
a. find the profit/loss from the futures
b. interest paid during loan from March 14,2015 to June 14,2015
c. Net cost to borrow
d. rate of borrow
e. Is your rate of borrow equal to the rate to borrow on Nov 15, 2014

II

Swap

20 pt

II.I
Amca and Swtz agree to enter a foreign currency swap between American dollars and Swiss
francs. One dollar is currently worth 0.96 francs. The American dollar payer will provide $5,000,000.00
The interest rate on the dollar is 6%, and the Swiss franc rate is 4%.
The swap calls for a life of 3 years with annual payments.
a. How much will the provider of the dollar pay at the outset?
b. If the interest rates do not change, what is the annual dollar interest payment for the

foreign borrower of dollars?
c. If a net payment is recorded for interest in year one and exchange rates do not

change, what will be the net payment?
d. What will be the total payment in francs by the borrower of dollars for year 3?
e. What will be the total payment in dollars by the borrower of francs for year 3?

III

Options Pricing

III.I

a. Short summary on the following Stocks CHK, C, DOW
b. find the returns for each stock from 11/21/13 - 11/20/14
c. find the annual volatility for each stock

45 pt

III.II

Find the Jan 17,2015 call and put values using Black Scholes equation for CHK,C and DOW
1. CHK : Current price = 24, Strike = 20, t = 2 months, rate = 1%
a. find (annual), d1,d2, N(d1),N(d2), N(-d1),N(-d2)
b. find the call and put values
c. which is ITM, call or put?
2. C : Current price = 53.7, Strike = 62.5, t = 2 months, rate = 1%
a. find (annual), d1,d2, N(d1),N(d2), N(-d1),N(-d2)
b. find the call and put values
c. which is ITM, call or put?
3. DOW : Current price = 52.74, Strike = 51.50, t = 2 months, rate = 1%
a. find (annual), d1,d2, N(d1),N(d2), N(-d1),N(-d2)
b. find the call and put values
c. which is ITM, call or put?
4. Find the implied volatility using goalseek for
a. CHK call, Explain
b. C put, find , Explain
c. DOW call, find , Explain

III.III Stock M is trading at $230.00, you want to price a 6 month American call on Stock M with strike
$210.00 in 5 steps. The annual volatility of Stock M is 25% , the current rf rate is 2% and you choose
the binomial pricing model.
a. Find t, u, d, and 1-
b. Complete Step 1 in the binomial pricing model
c. Complete Step 2 in the binomial pricing model
d. Complete Step 3 in the binomial pricing model, what is the current price of your option?

Extra - 5 pts
Swap Valuation
A $1,000,000 interest rate swap has semiannual payments based on average 3-month LIBOR.
The swap matures in 3 years and has a fixed payment rate of 3% annually. Calculate the value of the
swap for both fixed and floating rate payers using the zero coupon discount rates.

t
1

rt
1.0000%

2
3
4
5

1.3499%
1.8221%
2.4596%
3.3201%

6

4.4817%