1. Compare and contrast roles of the following participants in futures market. Explain the difference between these roles and how they benefit the overall market.
Hedgers
Arbitrageurs
Speculators
2. Many businesses have revenue that is sensitive to weather. In cases like these the businesses could hedge their risk using weather derivatives. Discuss an example of a weather derivative and how it is used by companies to mitigate risk.
3. A US company knows it will have to pay 50 million Yen in three months to a supplier. The current exchange rate is 0.1500 Dollars per Yen. Discuss how forward and options contract can be used by the company to hedge its exposure to exchange rate risk.
4. A portfolio manager has maintained an actively managed portfolio with a beta of 0.5. During the last year, the risk free rate was 2.5% and equities performed very poorly providing a return of -20%. The portfolio manager produced a return of -10% and claims that in the circumstances it was a good performance. Discuss this claim.
5. A bank can borrow or lend at LIBOR. Suppose that the six-month rate is 5% and the nine-month rate is 6%. The rate that can be locked in for the period between six-months and nine-months using an FRA is 7%. What arbitrage opportunities are open to the bank? Assume continuously compounded rates. Define what FRA is in this context.