FINA2204 - Copper Futures Contracts - Floating Rate - Accounting and Finance Assignment Help

Assignment Task :

Question 1 (FINA2204)

A speculator buys five March 2020 copper futures contracts on COMEX on 15 January 2020 at a price of US$2.8655 per lb and buys a further five March 2020 copper futures contracts on 30 January 2020 at a price of US$2.5280 per lb. The speculator closes out her long futures position on 12 February 2020 at a price of US$2.5975 per lb. The COMEX copper futures contract is written on 25,000 lbs of copper. For a speculator, COMEX sets the maintenance margin at US$2,700 per contract and the initial margin at 110% of the maintenance margin. 

Daily settlement prices (in US$ per lb) of the March 2020 copper futures contract during the period 15 January – 12 February 2020 are as follows: 

Required 

(a) At the time the initial futures position is established, what is the minimum price movement that will generate a margin call? 

(b) Complete Template A showing the daily marking-to-market (and final settlement) of the speculator’s futures position. This template is similar in format to Table 2.1 on page 30 in your textbook. Enter the appropriate figures or formulae only in cells that have been shaded grey. Do not make any changes to the format of Template A. 

(c) Calculate the overall profit/loss of the speculator and decompose this figure into two components: (i) total margin calls, and (ii) the change in the margin account balance. 

Question 2 (FINA2204)

In early 2007, the publicly-owned railway in the Portugese city of Porto, Metro do Porto (MdP), entered into an exotic interest rate swap with the Spanish bank, Banco Santander (BST) that came to be referred to as a ‘snowball’ swap. This swap, along with similar swaps promoted by BST, would later become the subject of litigation when MdP and other counterparties defaulted on their obligations during 2013. Refer to page 155 of the Approved Judgement for precise details on the terms of MdP’s swap, and in particular, how the ‘spread’ on the floating rate leg was determined. 

The ‘spread’ on the floating rate leg of the swap was related to three-month Euribor. Historical data on the level of this benchmark interest rate at quarterly intervals between 13 March 2009 and 13 December 2012 are as follows: 

(a) Complete Template B showing the interest rates and periodic cash flows due to be paid and received by MdP under the swap between 13 March 2009 and 13 December 2012. You should assume that the notional principal of the swap amortises on a straight-line basis between 13 December 2006 and 13 December 2022; refer to page 155 of the Approved Judgement for details. Do not make any changes to the format of Template B. 

(b) In his judgement of March 2016, Mr Justice Blair described this type of swap as ‘advantageous’ to MdP but ‘very risky’. What features of the swap with BST made it both ‘advantageous’ and ‘very risky’ to MdP? 

Question 3 

A corporate treasurer is contemplating buying a five-month down-and-out put option on the Australian dollar with an exercise price equal to the current spot rate of the Australian dollar of USD0.7200 and a barrier at USD0.6000. Her treasury analyst estimates that the Australian dollar will either rise or fall by 5% during each one- month period. The term structure is flat in both Australia and the US, with risk free rates of 1.5% and 0.5% p.a. respectively, continuously compounded. 

Required 

(a) Build a five-period binomial model in EXCEL to price the down-and-out put option. Make sure you include a binomial tree diagram for the exchange rate. 

(b) Compare the price of the down-and-out put option with that of a standard European put option priced using a five-period binomial model. Account for the difference in price. 

Question 4 

On 3 March 2020, five-year credit default swaps (CDS) on the senior US dollar- denominated debt of ANZ Banking Group were trading at 39.39 basis points, up from 25.55 basis points on 20 February 2020. These prices assumed a recovery rate of 40% on the debt of the reference entity. 

Required 

(a) Build an Excel model to estimate the implied probability of ANZ defaulting during a year conditional on no earlier default, as at 3 March 2020. You should assume that defaults always occur at mid-year, triggering an accrual payment, and that premium payments on the CDS are made once a year at the end of the year. The swap curve is flat in Australia, with swap rates of 2.0% p.a., continuously compounded, at all maturities. 

(b) Why did CDS prices rise between late February and early March 2020? 

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