Question

Suppose that the pension you are managing is expecting an inflow funds of RM 100 million...

Suppose that the pension you are managing is expecting an inflow funds of RM 100 million next year and you want to make sure that you will earn the current interest rate of incoming funds in long-term bonds.

  1. How would you use the options market to accomplish this goal? (4m)
  2. What are the advantage and disadvantage of using an options contract rather than a futures contract? (6m)
Business   Finance   
0 0
Add a commentTranscribed image text
Next >

Homework Answers

Answer #1

i:

You would buy a call option on long term bond for next year expiry and at a strike price which will result in an interest rate required.

ii:

Advantages of options are we are only spending the premium requirements for the long term bonds and in case of black swan events, the maximum amount that we will loose will be only the premium. Whereas on the upside we can enjoy as much profit potential as per the appreciation of the asset. Also there is no need for margin requirements compared to futures or MTM settlements for option Buying.

The disadvantage is the payment of premium and during highly volatile situatuion , the premium might be higher and cannot be justifiable compared to the strike price we are taking the contract.

0 0
Know the answer?
Your Answer:

Post as a guest

Your Name:

What's your source?

Earn Coins

Coins can be redeemed for fabulous gifts.

Log In

Sign Up

Not the answer you're looking for?
Ask your own homework help question
Similar Questions
b) Suppose the pension fund you are managing is expecting an inflow of funds of K100,...
b) Suppose the pension fund you are managing is expecting an inflow of funds of K100, 000 next year and you want to make sure that you earn the current interest rate of 8% when you invest the incoming funds. How would you use the futures market to do this? [10 marks] [TOTAL: 20 MARKS]
You run a pension fund in Boston and are responsible for managing $100 million. You can...
You run a pension fund in Boston and are responsible for managing $100 million. You can invest for one year in US bonds at 3% or in German bonds at 2%. The spot rate for a euro is $1.18. a. At what forward rate will you make the same return in the US and Germany? b. What is the forward premium with this forward rate? c. If the forward rate is $1.22/€, where will you invest for the year and...
You expect to receive a cash inflow of $50 million in five months. Today, you want...
You expect to receive a cash inflow of $50 million in five months. Today, you want to take a long synthetic stock position equal to $30 million with a beta of 0.65 and a long synthetic bond position equal to $20 million with a modified duration of 10.5. A stock index futures contract with a beta of 1.01 is priced at $200,500. A bond futures contract with a modified duration of 8.5 is priced at $102,300. The spot LIBOR for...
Please read the article and answear about questions. Determining the Value of the Business After you...
Please read the article and answear about questions. Determining the Value of the Business After you have completed a thorough and exacting investigation, you need to analyze all the infor- mation you have gathered. This is the time to consult with your business, financial, and legal advis- ers to arrive at an estimate of the value of the business. Outside advisers are impartial and are more likely to see the bad things about the business than are you. You should...
Review the Robatelli's Pizzeria Case Study. Develop another internal controls system, but this time, in the...
Review the Robatelli's Pizzeria Case Study. Develop another internal controls system, but this time, in the purchases and fixed assets business areas. Prepare a 12- to 16-slide presentation describing the purchases and fixed assets business areas. Be sure to incorporate speaker notes as well as appropriate visuals, graphics, fonts, etc. Include any associated risk in these areas. Describe specific internal controls that include authorization of transactions, segregation of duties, adequate records and documentation, security of assets, and independent checks and...
Analysis: This section should include the issue register as a bare minimum, but may include also...
Analysis: This section should include the issue register as a bare minimum, but may include also why-why diagrams, a Pareto chart, a waste table and/or value-added analysis table. Flow analysis or simulation of this case study might be possible but might require making a lot of assumptions given the provided data. The first part of the project: Introduction    Walmart has continued to retain the top position on the Fortune 500 list for a consecutive fifth year. The brand has...
3 SECURING THE WORKFORCE Diversity management in X-tech, a Japanese organisation This case is intended to...
3 SECURING THE WORKFORCE Diversity management in X-tech, a Japanese organisation This case is intended to be used as a basis for class discussion rather than as an illustration of the effective or ineffective handling of an administrative situation. The name of the company is disguised. INTRODUCTION In light of demographic concerns, in 2012, the Japanese government initiated an effort to change the work environment in order to secure the workforce of the future. Japan is world renowned for its...
2. SECURING THE WORKFORCE Diversity management in X-tech, a Japanese organisation This case is intended to...
2. SECURING THE WORKFORCE Diversity management in X-tech, a Japanese organisation This case is intended to be used as a basis for class discussion rather than as an illustration of the effective or ineffective handling of an administrative situation. The name of the company is disguised. INTRODUCTION In light of demographic concerns, in 2012, the Japanese government initiated an effort to change the work environment in order to secure the workforce of the future. Japan is world renowned for its...
What tools could AA leaders have used to increase their awareness of internal and external issues?...
What tools could AA leaders have used to increase their awareness of internal and external issues? ???ALASKA AIRLINES: NAVIGATING CHANGE In the autumn of 2007, Alaska Airlines executives adjourned at the end of a long and stressful day in the midst of a multi-day strategic planning session. Most headed outside to relax, unwind and enjoy a bonfire on the shore of Semiahmoo Spit, outside the meeting venue in Blaine, a seaport town in northwest Washington state. Meanwhile, several members of...
ADVERTISEMENT
Need Online Homework Help?

Get Answers For Free
Most questions answered within 1 hours.

Ask a Question
ADVERTISEMENT