Task: Swaps and other Derivatives
Question 1. Coffman & Tony Inc. can borrow at 13 percent in the long-term capital market (fixed rate) or can borrow at London Interbank offer rate (LIBOR) plus 75 basis points in the Eurodollar market. Jim & Pfeiffenberger Inc. can borrow at 12 percent in the capital market long term (fixed) or can borrow at LIBOR plus 50 basis points. Show a plain vanilla swap arrangement.
Question 2. Swap/cap/floor parity involves creating a zero cost collar such that cap premium equals the floor premium. You are looking at a $50, non-dividend-paying stock, with a risk-free rate at 5 percent. What strike price would make the one-year call premium equal to the one-year put premium.
Question 3. A swap dealer notes the following spot interest rates:
6 months 5.55 percent
12 months 5.75 percent
18 months 5.95 percent
24 months 6.10 percent
Determine the equilibrium swap price on a semiannual payment, two-year swap.
Question 4. A speculator buys July corn futures contract at $2.18/bushel and simultaneously writes a July 220 corn futures call option at 8 cents. Calculate the speculator’s combined gain or loss if the price of corn rises to 235 and the option is exercised.
Question 5. One hundred shares of a stock are purchased for $45 per share. Simultaneously, a 5-year warrant on the same company is sold short at $8. The warrant permits the purchase of 100 shares of stock from the company at $55. Over the next 5 years, a total of $2.50 in dividends is received on each share. What is your profit or loss if, at the end of the warrant’s life, the stock price is $60.