REVIEW QUESTIONS 1. Why did Nick Leeson sell numerous short straddles for each long futures contract he bought? When Nick Leeson was being promoted on the Singapore branch of the Barings bank‚ the strategy of the bank was to reduce the risk exposure by using a combination of one short straddle (combination of put / call) and for one long future. Since Nick Leeson used to be a specialist on Future contracts on Nikkei 225 and Japanese 10 years bond and was sure this market would arise. So
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CHAPTER 2 INTERNATIONAL MONETARY SYSTEM SUGGESTED ANSWERS AND SOLUTIONS TO END-OF-CHAPTER QUESTIONS AND PROBLEMS QUESTIONS 1. Explain Gresham’s Law. Answer: Gresham’s law refers to the phenomenon that bad (abundant) money drives good (scarce) money out of circulation. The phenomenon was often observed under the bimetallic standard under which both gold and silver were used as means of payments‚ with the exchange rate between the two metals fixed. 2. Explain the mechanism which
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The EMH‚ the Financial Crisis and the Behavioral Finance 1. Introduction The Efficient Market Hypothesis (EMH) that was first proposed by Fama (1965‚ 1970) is the cornerstone of the modern financial economic theory. The EMH argues that the market is efficient and asset price reflects all the relevant information concerned about its return. The genius insight provided by the EMH has changed the way we look at the financial crisis thoroughly. However‚ the confidence in the EMH is eroded by the
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Wonderful World of Hedge Funds The world of hedge funds has been feared by many for the strategies that hedge fund managers employ. Every manager has a different strategy. These strategies differ greatly from the strategies of mutual funds‚ which the general public perceives as safer. The opportunity to make large amounts of money is less‚ but mutual funds tend to be a safer place to park your money. Alfred Winslow Jones laid the foundation for modern-day hedge funds‚ while John Meriwether and
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1 The three year zero rate is 7% per annum and the four year zero rate is 7.5% pa (both continuously compounded). What is the one year (continuously compounded) forward rate starting in three years’ time? (2 marks) With the formula with continuously compounded‚ = =0.09 =9% The one year forward rate starting in three years’ time is 9% 1. The zero rate curve is flat at 6% pa with semi-annual compounding. What is the value of a FRA where the holder receives interest at the rate of 8% per annum
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CDO • Introduction to CDOs • Types of CDOs • Transaction Structure & Mechanics • Evaluation of CDOs • Risk associated with Investing in CDOs • Fair spread estimation with Monte Carlo Simulation • CASE STUDY: HVB ASSET MANAGEMENT ASIA (HVBAM) • CDO in Subprime Mortgage Crisis Introduction to Collateralized Debt Obligations (CDOs) A CDO is an asset-backed security whose underlying collateral is typically a portfolio of bonds (corporate or
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Norbert Guery Gupo Bimbo Case Summary: Bimbo is one of the world’s leading baking companies. Founded in Mexico‚ Bimbo is a house-hold name in its native country. Today‚ the company’s wide product range includes sliced breads‚ buns‚ cookies‚ snack cakes‚ pre-packaged foods‚ tortillas‚ salted snacks and confectionery products. Profitability in Mexico is optimal‚ partly due to its vending distribution through small‚ independent mom-and-pop stores. In addition‚ its product development and incorporation
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deleted and remaining stocks will suffer from downside risk. However‚ shareholders of an index do enjoy zero tracking errors and will certainly wait until the effective day to rebalance. Therefore‚ as a trader at Goldman Sachs‚ I would play the arbitrage game. I would provide liquidity to index investors by shorting freshly added stocks and buying excluded ones. Via this move‚ I would hope a forthcoming favorable reversal impact as I expect (perhaps wrongly) prices to return to normality. After all
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–S0 Cash Flow at Time T ST + D Short futures 0 F0 – ST Borrow S0 –S0(1 + r) Total 0 F0 + D – S0(1 + r) b. The net initial investment is zero‚ whereas the final cash flow is not zero. Therefore‚ in order to avoid arbitrage opportunities‚ the equilibrium futures price will be the final cash flow equated to zero. Accordingly: F0 = S0 (1 + r) – D c. Noting that D = (d S0)‚ we substitute and rearrange to find that: F0 = S0 (1 + r – d) 7. a. F0 = S0 (1 + rf) = $120
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Bibliography: Abreu D.‚ Brunnermeier M. (2002)‚ “Synchronization risk and delayed arbitrage”‚ Journal of Financial Economics‚ Vol. 66‚ 2-3‚ p. 341-360 Barber B.‚ Odean T. (2001)‚ “Boys will be Boys: Gender‚ Overconfidence‚ and Common Stock Investment”‚ Quarterly Journal of Economics‚ Vol. 141‚ 2‚ p. 261-292 De Long B.‚ Shleifer A.‚ Summers
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