Question 1: What is the theoretical price of the MMI March ’86 futures contract? To calculate the theoretical price of the MMI March ‘86 futures contract, we applied the formula: F(t,T) = S(t) * Exp(r(T-t) - y) Here, we assume 23 days from February 26 to March 21 and used 23 days as “t to T”. We used dividend yield (3.41/1374.5 = 0.25%) as y, the cash index $311.74 as S(t), and one month treasury 6.8% as r. According to our calculation, the theoretical price will be $ 312.30. Question 2: Assume that Jim is subject to a $5,000,000 position limit. What position should he take to exploit the mispricing for the March '86 MMI futures? In order to decide which position Jim should take to earn a profit, we have to compare the …show more content…
To calculate the return at T, several calculations have to be performed. The following formula is applied to calculate the future value of the loan taken, in other words, what Jim has to buy back at T: 〖FV〗_l (T)=〖PV〗_l (t)e^r(T-t) with 〖PV〗_l (t) = $4,999,516.42 (90% of totally used money), rl = 8%, and T-t = 23/365. This results in 〖FV〗_l (T) $5,024,783.10 which Jim has to pay back to the bank. The same formula can be applied to calculate the expected future value of the own funds with 〖FV〗_o (T) = $502,478.31 (it also assumes r = 8% interest). The underlying stock which Jim bought at t can be sold for S(T) at March 21st. As Jim bought the underlying he will also receive dividends worth $12,371.48. With regard to the short futures, Jim has to buy shares at S(T) which he then can sell at a price of $5,016,800.00 (see Figure 2). Question 3: What rate of return can Jim expect to earn on his position? As shown by Figure 2, the total return from these transactions will be $1861.72. Based on the input of own funds, the total annualized return on that transaction would be 6.076%. Figure 3 shows in addition the return on the overall employed funds. Question 4: Who, in addition to security dealers, would you expect to engage in index-futures arbitrage? Besides dealers, following people engage in index future arbitrage for a variety of reasons: Speculators Institutional Investors High frequency traders Investors that have the
Given that the total profit over 8 years is $1.2375B (or $155M per year for 8 years), we will now compute the Present Value of this amount using the following formula:
For the Motorking Corporation, the DSI tree estimates a profit of $1,885,137.50 in a strong economy and after subtracting the DSI fee of $20,000 leaves the corporation with $1,865,137.50 which is greater than $1,577,291 (This is Motorking’s Expected Value for Perfect Information). This proves that the Motorking should hire DSI to conduct a market survey.
3. For a crime to be committed, the prosecutor must be able to prove a criminal intent and an overt act to carry out that intent. Jack and Mary agreed to rob a series of banks. Prior to beginning their bank robbery spree, they were arrested and charged with criminal conspiracy. What act did Jack and Mary do that justifies a finding that they committed the crime? Explain.
It follows that the NPV at t=0 can be found by discounting the above number three years at 12% -- doing so you get a value of $0.2669 million – which is an estimate of what you pay for the sequel right at t=0.
Please answer the questions posed at the end of each case study in essay form. Each essay will be judged on your capacity to present strong, logical discussions that support your conclusions.
9. You want to purchase a business with the following cash flows. How much would you pay for this business today assuming you needed a 14% return to make this deal?
Homework 2 Solution, Fin 500Q, Quantitative Risk Management 1. Assume gold price risk is diversifiable, and the riskless rate is 5%. A firm produces a unit of gold a year from today. Assume all interest is compounded annually and is tax deductible. The price of gold is either $500 or $200, each with probability 0.5. Suppose the firm pays taxes at a rate of 40% for all its cash flow in excess of $300. The value of the firm is the expected discounted value of its cash flow less the expected discounted value of bankruptcy costs and taxes that it pays. The firm can hedge by buying/selling forward contracts on gold. Start by assuming that bankruptcy costs are zero. (a) Find the value of the unhedged unlevered firm. (10 points) Answer: 1 · [350 − 0.5 ·
8. Calculate the return on investment in dollars and as a percentage for an investment that you purchase for $500 and sell for $600. (2.0 points) 20 % ($100 profit)
Calculate the Nominal Payback, the Discounted Payback, the Net Present Value and the IRR assuming:
Commodity prices – parallel to stock prices – can boom and bust without warning affected by numerous reasons. For this reason alone, having an agreed minimum price is a great importance for farmers. For an instance, a large-scale crop failure leads to not enough rice, but higher prices. Bearing this in mind, agreed prices becomes an interest for the end users, therefore making both the retail merchants and end users obtain advantages from the futures contract to have a solidified market transaction.
In the case of Anthony, a New Jersey resident and owner of a waste disposal company in the state of New Jersey, and his two business associates, Paul and Silvio, whom suffered severe injuries due to a motor vehicle accident caused by a negligent truck driver; they have great standing to sue against the neglectful driver and the company associated with the ownership of the vehicle. Regardless of the diversity of their residency/ citizenship, the affected party can proceed to sue the corporation responsible for the damages caused by their staff and property; reason being that they are protected under the Constitution’s diversity of citizenship, and the privileges and immunities clause. Furthermore, these two constitutional clauses in addition to the commerce clause, dictate the court that the matter needs to be brought to.
The main purpose of this game is to identify and respond to the risk in the market. At the beginning of the game, as the trend in the market has not been identified, small trade size of futures was buy/sell and close off immediately after I observed that the market price is changing. As a general rule, I long futures while the futures appeared to be in in bullish market and, in contrast, short them in bearish market. When the market price on futures is on an upward trend, I long futures at market price and sell them when price has raised. In contrast, I short futures contracts at market price and buy them back while the price has dropped to a lower price than the origin price that I sold. One thing to note that there are times that while I am holding on a long
Finally, in order to complete a more accurate comparison between the two projects, we utilized the EANPV as the deciding factor. Under current accepted financial practice, NPV is generally considered the most accurate method of predicting the performance of a potential project. The duration of the projects is different, one lasts four years and one lasts six years. To account for the variation in time frames for the projects and to further refine our selection we calculated the EANPV to compare performance on a yearly basis.
Futures belong to the class of securities known as derivatives since its value is derived from the value of some other security. A futures contract is similar to a forward contract. Noting the shortcomings of the forward market, particularly the need and the difficulty in finding a counter party, the futures market came into existence. Futures contract is an agreement between two parties, that is a buyer and a seller, to buy or sell a particular currency or commodity at a future date, at a particular exchange rate that is fixed or agreed upon today.