question 1:

a) Discuss the risks associated with derivative trading.

b) Define and explain the terms 'Backwardation' and 'Contango' in relation to commodities futures market.

c) Imagine that you produce consumer products using oil-based chemicals as inputs. Suppose you purchase your oil from Russia and pay in Russian ruble. You are concerned that the appreciation in the ruble will affect your profitability. How would you use forward contracts to hedge the risk of your oil purchases?

question 2:

You are working with a commodity that needs to be delivered in four-month period. You know that the forward price is €10.50, and the spot price is €10.15. You assume that the continuously compounded interest rate will be 9% p.a. Using relevant formulas, calculate whether there is any opportunity for arbitrage in this current market for this commodity. Assume that the commodity can be stored with no cost. Provide detailed explanations for each step and interpretations of the results.

question 3:

You are thinking to buy diamonds. You know that the current price of diamonds is €2450 per oz. You also think that this is a good investment as there is no cost of storing it. Assume that there is the flat term structure with a continuously compounded interest rate of 7% for all maturities.

a) What is the forward price of diamond with the five-month delivery?

b) What does happen to a forward price if you need to store diamonds with the cost €1 per oz per month (payable monthly in advance). Calculate the new forward price.

c) Using the calculations in part (b), assume now that the forward price is €2550 per oz. Calculate whether there is an arbitrage opportunity and how you could exploit it.

question 4:

You are dealing with two stocks: Stock 1 and Stock 2. You have the following information about these two stocks:

????1 = 1.5

????2 = 0.25

one − year ???????? = 2

????(????????) = 10%

You also know that both stocks currently trade at £10. Assume that Stock 1 pays 1% dividend yield p.a., whereas Stock 2 pays no dividend. Assume that you will use the CAPM model.

a) Calculate the expected return on both stocks.

b) Calculate the one-year forward price for the two stocks.

c) Following your calculations in parts (a) and (b), do you think there is an opportunity for arbitrage? Why? Explain.

It is fine if it is not possible to solve them all. Even the answer from one of them would be fine.

Could you please add the references from which you obtained the details?

pur-new-sol

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