1) Suppose a financial asset, ABC, is the underlying asset for a futures contract with settlement of 6 months from now

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1) Suppose a financial asset, ABC, is the underlying asset for a futures contract with settlement of 6 months from now. You know the following about this financial asset and futures contract in the cash market ABC is selling for P80; ABC pays P8 per year in two semiannual payments of P4, and the next semiannual payment is due exactly 6 months from now; and the current 6- month interest rate at which funds can be loaned or borrowed is 6%. a) Compute for the profit for the transaction? b) What is the theoretical (or equilibrium) futures price? c) What action would you take if the futures price is P83? d) What action would you take if the futures price is P76? 2. Milo Corporation has a line of credit with BDO for P5,000,000 in June 30, 2018 payable on December 31, 2019. The company has no existing deposit with the bank. The bank requires the borrower a compensating balance of 5% and charges 15% for loans availed. a) How much should the company borrow to have a net proceeds of P5,000,000? b) What is the effective interest rate from this transaction if: b-1) interest rate is paid at the end of the term? b-2) interest is deducted in advance? 3. Suppose a financial asset, ABC, is the underlying asset for a futures contract with settlement of 6 months from now. You know the following about this financial asset and futures contract in the cash market ABC is selling for P120; ABC pays P18 per year in two semiannual payments of P9, and the next semiannual payment is due exactly 6 months from now; and the current 6-month interest rate at which funds can be loaned or borrowed is 6%. a) What is the theoretical (or equilibrium ) futures price? b) Suppose that ABC pays an interest quarterly instead of semiannually, What would be the theoretical futures price for 3 months settlement?
c) Suppose that the borrowing rate is 8% and the 6-month lending rate is 6%, What is the boundary for the theoretical futures price? 4. Assume that the call option of the asset stated below has a strike price of P100 expires in 4 months from now with one-period risk free of 5%. Compute for the call option price. ASSET G PRICE P135 80 H 5. The Acme Insurance Company purchased a 5-year bond whose interest rate floats with LIBOR. Specifically, the interest rate in a given year is equal to LIBOR plus 200 basis points. At the same time the insurance company purchases this bond, it enters into a floor agreement with the Bear Stearns in which the notional amount is P35 million with a strike price of 6%. The premium Acme Insurance Company agrees to pay Bear Stearns each year is P300,000. a) Suppose at the time that it is necessary to determine whether a payment must be made by Bear Stearns, LIBOR is 9%. How much must Bear Stearns pay to Acme Insurance Company? b) Suppose at the time that it is necessary to determine whether a payment must be made by Bear Stearns, LIBOR is 3%. How much Bear Stearns pay to Acme Insurance Company? 6. Calculate the EIR, if the trade credit under each of the following: a) 2/10, n/60 b) 2/10, n/60