regular swap only two days ago in the in-arrear version. In an in-arrear‚ since the reset rate paid is not paid after its reference period as in a standard swap‚ the floating leg cannot be valued as the sum of the forward Libors but has to take into account the volatility of the forward rates via an adjustment called the convexity correction. We will give more details when examining the pricing of in-arrear swaps. MARKETING OF IN-ARREAR PRODUCTS In-arrear swaps are popular products in a steep yield
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market portfolio is 6%. Assume continuous compounding. Assume that oil β = 1.5. Let the spot price of oil be 100. (a) Suppose the forward price of oil (F0 ) for a contract that matures in 2 years trades at $130. What is the quantity u − y implied by this forward price? (b) Suppose there is no trading in 6-month and 1-year forward contracts. What would be the forward prices of oil at 6-month and 1-year maturities
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Solutions: SAMPLE 2: EXAM 4: FINA 4500 Short Questions / Problems Section: (84 points) Q1. (12 points) The table below presents bid-ask quotes for British Pounds (BP) from several currency dealers around the world. Currency Dealer in Zurich Hong Kong London New York Bid/Ask Quotes for BP $1.4463-71 $1.4471-76 $1.4469-75 $1.4460-70 a) In order to take advantage of locational arbitrage‚ a currency speculator should: (i) Buy BP from the New York dealer at the ask price
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better reflect a healthy lifestyle. Given all this downward pressure on the marketplace‚ it is increasingly difficult for smaller processing companies to compete. This becomes even more difficult when we consider the pricing of inputs and the complex futures market where green coffee is traded. For larger corporations (Maxwell House brand‚ Philip Morris‚ P&G) their large capital stake and stability allows them to
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DERIVATIVE CASES CASE STUDY II AMERICAN BARRICK RESOURCES CORPORATION: MANAGING GOLD PRICE RISK Group II - Cohort 5 American Barrick is the largest gold producer in North America. The implementation of the gold-hedging program differentiated the firm from other major gold rivals and improved its reserve and financial strength. In 1995‚ American Barrick ’s latest
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payment cost for Pixonix in Canadian dollars if it hedges by going long a forward contract for US$ 7.5 million. Fill out the table below. (Note: the forward rates are direct quotes for the Canadian dollar. For simplification‚ assume that the forward contract and payment all expire three months from November 2‚ 2007) Table 1: Forward vs. Unhedged Position Expected Spot Rate in 3 months Unhedged payment C$ Forward gain/loss C$ Net Payment C$ C$ 0.90/$ 6.75M C$ 1.00/$ 7.5M C$ 1.10/$
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Rmb (considering the Rmb was fixed to the dollar and the dollar had been falling against the Euro‚ the falling Rmb was unavoidable). XJP are constrained with the restrictions Chinese law has put on investment so they are restricted to buying forward contracts for commercial purposes only‚ corporate policy to hedge a minimum 80% of its anticipated currency exposures and the reluctance of J&J to bear any risk associated with currency exposure leaving XJP vulnerable. J&J has roughly 200 foreign subsidiaries
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Daniel Pinga AEM 4290 General Motors‚ JPY-USD Exposure Executive Summary General Motors Corporation‚ the world’s largest automaker‚ has an extensive global outreach‚ which places the firm in competition with automakers worldwide‚ and subjects itself to significant exchange rate exposure. In particular‚ despite most of its revenues and production being derived from North America‚ depreciating yen rates pose problems for the firm indirectly through economic exposure. While GM possesses ‘passive’
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by a currency trading at a discount or at a premium in the forward market? Answer: The forward market involves contracting today for the future purchase or sale of foreign exchange. The forward price may be the same as the spot price‚ but usually it is higher (at a premium) or lower (at a discount) than the spot price. PROBLEMS 4. Restate the following one-‚ three-‚ and six-month outright forward European term bid-ask quotes in forward points. Spot 1.3431-1.3436 One-Month 1.3432-1.3442 Three-Month
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Aloha products Aloha Products is a United States-based coffee-processor company that has been providing non-specialty and low-priced coffee for over a hundred years. It purchases the raw materials or what buyers and sellers refer to as “green coffee” from brokers and trade firms then processes the coffee and sells the final product to customers. Large companies such as Nestle and P&G directly import the unprocessed or green coffee beans from coffee plantations in tropical countries such as Brazil
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