Reference no: EM132255171

QUESTION 1. During a certain year, interest rates fall by 200 basis points (2%) and equity prices are flat. Discuss the effect of this on a defined benefit pension plan that is 60% invested in equities and 40% invested in bonds. (2018)

QUESTION 2. An investment bank has been asked to underwrite an issue of 10 million shares by a company.
It is trying to decide between a firm commitment where it buys the shares for $10 per share and a best efforts where it charges a fee of 20 cents for each share sold. Explain the pros and cons of the two alternatives. (2018)

QUESTION 3. It is March and Cavalier Financial Services Corporation is concerned about what an increase in interest rates will do to the value of tis bond portfolio. The portfolio currently has a market value of $101.1 million, and Cavalier's management intends to liquidate $1.1 million in bonds in June to fund additional corporate loans. If interest rates increase to 6 percentage, the bond will sell for $1 million with a loss of $100,000. Cavalier's management sells 10 June Treasury bond contracts at 109-050 in March. Interest rates do increase, and in June Cavalier's management offsets its position by buying ten June Treasury bond contracts at 100-030. (2017/15)

a. What is the dollar gain/loss to Cavalier from the combined cash and futures market operations described above?
b. What is the basis at the initiation of the hedge?
c. What is the basis at the termination of the hedge?
d. Illustrate how the dollar return is related to the change in the basis from initiation to termination.

QUESTION 4. A company uses delta hedging to hedge a portfolio of long positions in put and call options on a currency. Which of the following would lead to the most favorable results : (a) a virtually constant sport rate or (b) wild movements in the spot rate ? How does your answer change if the portfolio contains short option positions? Please give an example from your Lab date. (2016/14), (2014/14)

QUESTION 5. An insurance company's losses of a particular insurance policy are to a reasonable approximation normally distributed with a mean of $150 million and a standard deviation of $50 million. The one-year risk-free rate is 5%. Estimate the price of the following contracts : (2016/10)

(a) A contract that will pay in one-year's time 60% of the insurance company's costs on a pro
rate basis.
(b) A contract that pays $100 million in one-year's time if losses exceed $200 million.

QUESTION 6. What forms of risk affect investments? Please explain it by financial market case. (2017/16)

QUESTION 7. Why is the informational asymmetries key problem for credit risk management ?(2016/13), (2014/13)

QUESTION 8. What is the coherent risk measure ? Describe the four axioms for a coherent risk measure. Do you think these axioms are reasonable ? Why ? (2016/9)