1. CMC June 2014 Mark Fielding-Pritchard

2. Part A Forward  Spot 1.0635$:ChF1  4 month rate 1.0677  5060/ 1.0677= ChF4739

3. Part A Future  Sell 6 month  (5060/1.0659)/125= 38 contracts  In 4 months buy back  Today future price= 1.0659  Spot= 1.0635, basis risk = 24  Therefore in 4 months future price = 1.0677+ 0.0008= 1.0685 Sold1.0659 Buy1.0685 Loss0.0026 00026x 125000x 38$12350 5060 $5072 @1.0677ChF4751

4. Part A Option EX Price 1.06, we receive1.0384 Ex Price 1.07, we receive1.0437 (5060/1.07)/12500038 Buy 38 6 month puts ChF$ 1174662.63c x 125000 x 38= 124925 38x 125000= 4.75m38x 125000 x 1.07= 5082500 (21073)(22500) 4847

5. Summary ChF Forward4739 Future4751 Option4847 Choose the forward

6. Part B, Swap FixedFloating CMC2.2Libor +40 Cpart3.8Libor+80 Differential16040 Gain120 CMC40 Cpart40 Bank40 CMC borrows at 2.2%, swaps to floating LIBOR

7. Part c Macauley 4 year annuity factor = 3.808. Therefore each payment will be 60m/3.808= 15756 1575615441 3151230283 4726844527 6302458234 148485 /600002.47 2.47/1.02 2.42 So if interest rates rise by 0.5% bond price will fall 2.42 x 1.005 1.21%

8. What affects duration  Bond's Price: The higher the mv of the bond, the lower the duration  Coupon: The higher a bond's coupon, the more income it produces early on and thus the shorter its duration. The lower the coupon, the longer the duration (and volatility). Zero-coupon bonds, which have only one cash flow, have durations equal to their maturities.incomebonds  Maturity: The longer a bond's maturity, the greater its duration (and volatility). Duration changes every time a bond makes a coupon payment. Over time, it shortens as the bond nears maturity.  Yield to Maturity: The higher a bond's yield to maturity, the shorter its duration because the present value of the distant cash flows (which have the heaviest weighting) become overshadowed by the value of the nearer payments.  Sinking Fund: The presence of a sinking fund, which is a scheduled prepayment of the bond before it matures, lowers a bond's duration because the extra cash flows in the early years are greater than those of a bond without a sinking fund.  Call Provision: Bonds with call provisions also have shorter durations because the principal is repaid earlier than a similar non-callable bond. Call Provision principal

9. Part d Hedging For Opening  Reduce risk  Reduce cost  Improve governance  Lower shareholder fears  Shouldn’t be assuming risk Against  Unnecessary if well informed  Don’t assume unnecessary risk  Expense outweighs benefit  Low interest rates, strong pound

10. Part d Agency For Opening  Communication  Training  KPIs/ Compensation  Promotion/travel/ secondment Against  Lack of goal congruence  Lack of control  Culture  Laws