Question 1: Using bullet points following with explanations and discussions to show the answers is encouraged.
1. Companies A and B have been offered the following rates per annum on a $20 million five-year loan:
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Fixed rate
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Floating rate
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Company A:
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3.0%
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LIBOR+1.5%
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Company B:
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5.0%
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LIBOR+2.0%
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Company A requires a floating-rate loan; company B requires a fixed-rate loan. Design a swap that will net a bank, acting as intermediary, 0.5 % per annum and that will appear equally attractive to both companies.
Question 2. Explaining how swaps (including interest rate and currency swap) work and the way they can be used to transform assets and liabilities.
Question 3. Use DerivaGem to calculate the value of an American call option on a non-dividend-paying stock when the stock price is USD 35, the strike price is USD 30, the risk-free rate is 3%, the volatility is 20% and the time to maturity is 2 years. (Choose 'Binomial American' for the option type and 50 time steps.)
a) What is the option's intrinsic value?
b) What is the option's time value?
c) Change the volatility value and the time to maturity to discuss how the option's value is affected by them.
Question 4. A call with a strike price of $30 costs $4. A put with the same strike price and expiration date costs $6. Construct a table that shows the profit from a straddle. For what range of stock prices would the straddle lead to a loss?