Do exercise 1FINM32100 — Financial Markets Home Assignment (30% of Final Grade) Roméo Tédongap Out:...

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Do exercise 1FINM32100 — Financial Markets Home Assignment (30% of Final Grade) Roméo Tédongap Out: October 26, 2020 Due: November 06, 2020 Instructions: Please, work by teams of three students and solve all parts of all problems in Excel whenever feasible. Problem 1 is worth 55%, Problem 2 is worth 15% and Problem 3 is worth 30%. Upload your team’s copy on November 06, 2020, 13:00 at latest, on Moodle. Do not hesitate to contact me for all remaining questions. Homework submitted late will receive half the grade. If you do not submit your homework by November 06, 2020, 16:00 at latest, you are automatically disqualified for the final exam. 1. The Excel file “AssignmentData2020.xlsx” contains historical daily close values of the November 2020 futures prices of France CAC40 index (CAC40F) and Sweden OMX30 index, the December 2020 futures prices of the Germany DAX index (DAXF) and the UK FTSE100 index (FTSE100F), and bid and ask spot prices of the Euro/Swedish Krona and Euro/UK Pound Sterling FX cross rates. The file also contains share prices of four Exchange Traded Funds (ETF) from Lyxor Asset Management. You can learn more about Lyxor at https://www.lyxor.com/en/. The historical data runs from November 7, 2006 to October 23, 2020. At the end of August 2020, you purchase a long position in 4,777 shares of the Lyxor STOXX Europe 600 Utilities UCITS ETF (LYXUTIL), 3,791 shares of the Lyxor STOXX Europe 600 Technology UCITS ETF (LYXTECH), 8,187 shares of the Lyxor STOXX Europe 600 Oil & Gas UCITS ETF (LYXENRG), and 15,470 shares of the Lyxor MSCI Eastern Europe Ex Russia UCITS ETF (LYXEAST) you plan to sell at the end of September 2020. You hedge your position by agreeing to trade stock market indexes through a position in existing futures contracts, specifically intending to liquidate your position early at the end of September 2020. The four Futures contract specifications and overview of the four Lyxor ETFs are provided in the appendix. The initial and maintenance margins required for futures trading are respectively EUR 6,050 and EUR 5,500 for CAC40, EUR 46,570 and EUR 42,330 for DAX, SEK 29,300 and SEK 26,630 for OMX30, and GBP 7,370 and GBP 6,700 for FTSE100. You shall consider the end of a month to be the last trading day. (a) Explain the different advantages of your investment in ETFs, and explain the dif- ferent sources of imperfections characterizing your hedge. (b) Suppose you adopt an optimal hedge using CAC40 futures only. Using all historical data available up to end of August 2020, compute your hedge ratio, as well as your expected profit and its volatility on August 28, 2020. What is your realized profit on September 30, 2020? Compute your daily gain/loss over your one-month investment horizon, together with your margin account balance, your excess margin and your variation margin (in case of a margin call). Comment on the results. (c) Suppose you adopt an optimal hedge using OMX30 futures only. Using all historical data available up to end August 2020, compute your hedge ratio, as well as your expected profit and its volatility on August 28, 2020. What is your realized profit on September 30, 2020? Compute your daily gain/loss over your one-month investment horizon, together with your margin account balance, your excess margin and your variation margin (in case of a margin call). Compare your results to those obtained in part (b) and interpret them. 1 (d) Suppose you adopt an optimal hedge using all four financial futures. Using all historical data available up to end of August 2020, compute the optimal numbers of contracts, as well as your realized profit on September 30, 2020. Compute your daily gain/loss over your one-month investment horizon, together with your margin account balance, your excess margin and your variation margin (in case of a margin call). Compare your results to those obtained in parts (b) and (c) and discuss. 2. Let P0 be the price at time 0 of an N -period bond with a yield per period r, a coupon C and a par value PN . Denote by D0 the duration of the bond. Let H be an integer such that 0 ≤ H ≤ N . Denote by RH the value at time H of the first H coupons reinvested at the rate r, and let PH be the selling price of the bond at time H assuming no change in interest rates, that is, PH is the price of an (N −H)-period bond with the same yield per period r, the same coupon C and the same par value PN . (a) Find the reduced form expression of P0, RH and PH . (b) Prove that ∂RH ∂r > 0 and ∂PH ∂r  H, D0                                   DELAYED DATA           -        Delayed alias                    5 BEST LIMITS          -                                                 OPTIONS (Monep)        -                                   UNIT OF TRADING        -       Valued at EURO 10 per Index point                  DELIVERY MONTHS        -       Nearest three of March, June, September, December                                 plus such additional months that the nearest                                      three calendar months are available for trading,                                  plus eight half-yearly maturities from the March,                                 September cycle. From December 2008 expiry                                        onwards, eight half yearly maturities from the                                    June/December cycle.

FINM32100 — Financial Markets Home Assignment (30% of Final Grade) Roméo Tédongap Out: October 26, 2020 Due: November 06, 2020 Instructions: Please, work by teams of three students and solve all parts...

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