Adms

ADMS4503 – Derivative Securities

Fall 2011

YORK UNIVERSITY Faculty of Liberal Arts and Professional Studies School of Administrative Studies

AP/ADMS 4503.03 DERIVATIVE SECURITIES

MIDTERM EXAMINATION

Sunday, October 23, 2011 12:00 - 2:00 p.m.

Prof. Nabil Tahani

INSTRUCTIONS 1. Allowed material: Textbook, lectures notes and a calculator. 2. This examination contains 4 questions on 3 pages (including this cover page) and carries a total mark of 40 points. 3. Answer all questions in the examination booklet provided. 4. If you have to make any assumptions, state them clearly. Unrealistic assumptions, or those inconsistent with the information provided in the question, will not be accepted. 5. All interest rates are per annum and continuously compounded. 6. Keep at least 4 decimal places in your calculations and final answers, and at least 6 decimal places for interest rates. 7. Show your work, including all formulas.

Midterm Examination

1

ADMS4503 – Derivative Securities Question 1 (10 marks)

Fall 2011

The S&P spot is 1,155 and the 1-year futures delivery price is 1,180. The NASDAQ spot price is 2,202. The S&P and the NASDAQ are expected to pay the same dividend yield continuously compounded. The risk-free rate is 4%. For simplicity, we assume that both contracts pay $1 times the index. (a) What is the dividend yield paid by the two indices? (4 marks) (b) What is the NASDAQ theoretical 1-year futures price? (2 marks) (c) Actually, the NASDAQ 1-year delivery price is 2,240. Show that there is an arbitrage and how you will undertake it? Show all details. (4 marks)

Question 2 (10 marks) The spot price of cocoa is $2,695 per metric ton and the storage cost is $50 per semester per metric ton paid at the start of each semester. The 6-month futures price of cocoa is $2,750 per metric ton. The risk-free interest rate is 4%. Today, you enter four 1-year futures contracts on cocoa today to hedge against any rise in cocoa prices next year. We assume that the cocoa...