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FINA2005 – Derivatives and Risk Management Module 2

Torrens University Australia
FINA2005 Derivatives and Risk Management Module 2 homework questions
1. Differentiate between spot price and forward price.
2. Differentiate between price and value of a forward contract.
3. Explain interest rate parity and how this parity relationship helps to
calculate forward exchange rates from the spot exchange rates. Why
do interest rates vary between two countries?
4. Calculate the six-month forward exchange rate between Great Britain Pound (GBP) and
Australian dollar (AUD) if the spot exchange rate for GBP is 1.645 AUD, the Australian
risk-free rate is 2.50% and UK risk-free rate is 2%. Assume that the interest rates are
annually compounded.
5. Calculate the six-month forward exchange rate between Great Britain
Pound (GBP) and Australian dollar (AUD) if the spot exchange rate for
GBP is 1.645 AUD, the Australian risk-free rate is 2.50% and UK riskfree rate is 2%. Assume that the interest rates are continuously
compounded.
6. Suppose you buy a forward contract today at a price of \$95. The contract expires in 30
days. The risk-free rate is 3 percent. Now 10 days later, the spot price of the asset is \$102.
What is the value of this forward contract 10 days after the contract was bought? Assume
that the interest rates are annually compounded.
7. Suppose you buy a forward contract today at a price of \$95. The
contract expires in 30 days. The risk-free rate is 3 percent. Now 10
1 days later, the spot price of the asset is \$102. What is the value of this
forward contract 10 days after the contract was bought? Assume that
the interest rates are continuously compounded.
8. Should the forward contract (or futures contract) price be higher or
lower when the underlying generates cash flows and by how much?
Explain with an example of a stock that pays dividends.
9. Should the forward contract (or futures contract) value be higher or
lower when the underlying generates cash flows and by how much?
Explain with an example of a stock that pays dividends.
10. How do cost of carry and risk premium impact the forward contract (or
futures contract) price? What are the elements of cost of carry? 2