MAF308 : Derivatives and Fixed Income Securities - Finance Assignment

Internal Code - MAS4439

Finance Assignment

Questions: 1.The yield to maturity of above particular bond is 1.858% per annum annually compounding on 11/7/2017. What is the market price of this bond on 11/7/2017? (Or equivalently to ask, how much do you need to pay to get this particular bond on 11/7/2017?) 2.Construct a graph for the above bond showing the relationship between bond price (Y? axis or vertical axis) and yield?to?maturity (X?axis or horizontal axis) for a range of yield?to?maturity (annualized) of 1.0% through 3.0% with step size of 0.1%. All yields are annualized and yearly compounding. Discuss the relationship between bond price and yield?to?maturity. 3.For this question, you will need to access resources from the library and/or internet, to investigate how Futures can be used to hedge or speculate. (At least 2 citations are required to support your investigation. 500 words) 4. Metallgescellschaft AG or MG is a German conglomerate. They have several subsidiaries in its "Energy Group", with MG Refining and Marketing Inc. (MGRM) in charge of refining and marketing petroleum products in the U.S. It was revealed publicly that it recorded a losses of approximately $1.3 billion at year?end 1993 due mainly to cash?flow problems resulting from large oil forward contracts it had written (Mello and Parsons 1995). What happened was that MGRM committed to sell certain amounts of petroleum every month for up to 10 years at prices fixed in 1992 (i.e., MGRM has written oil forward contracts). To hedge their position, during the latter half of 1993, MGRM established long energy futures (and swaps) positions equivalent to nearly 160 million barrels of oil, positionsthat would benefit handsomely if energy prices rose (Edwards 1995). Instead, energy prices (crude oil, heating oil, and gasoline) fellsharply during the latter part of 1993, causing MGRM to incur huge unrealized losses and margin calls on its derivatives positions. An important aspect of MGRM’s hedging strategy is that its derivatives positions were “stacked” in short?dated futures (and swaps) that had to be rolled forward periodically to maintain the hedge (Mello and Parsons 1995). MG's losses in the futures (and swaps) markets have raised questions about whether MG was really hedging or speculating. Please check the following two reading references and internet resource for this famous case (i.e., google “Metallgescellschaft AG”) and answer the following questions. Give your own (informed) opinion on whether you felt that MG was hedging or speculating and justify your stance using appropriate literature to support your argument. 5. Hull (2016) claims that for the purpose of hedge using futures, the “choice (of contract) has two components: 1. the choice of the asset underlying the futures contract; 2. the choice of the delivery month”(p.73). In reference to the information from the textbook cited above discuss, in general terms, how underlying assets mismatch (e.g. the asset you want to hedge is jet oil, but because there is no jet oil futures, you can use heating oil futures) and maturity mismatch (e.g. the maturity of the futures is different from, usually shorter than, the maturity you need) impact hedge results. 6.For the company you choose, collect the stock (last) price, and liquid option prices, and include the date you collected these prices.

•  Call options have the same strike price but 2 different maturities
•  Put options have the same strike price but 2 different maturities
• Call options have the same maturity but 3 different strike prices
• Put options have the same maturity but 3 different strike prices

For each option, collect expiry date, call or put identifier, exercise price or strike price, bid price, offer price, last price, volume, and open interest. Present this information in table format. 7.Explain how option prices vary with different strike price and different expiration dates. Provide your reasoning rather than simply saying, for example, strike price increases, and call option price decreases.