Finance Question
SEU | BA ASSIGNMENT 2 : FIN301 YEAR : 2024 The notion of an efficient frontier that contains all asset portfolios that maximize expected return for a given level of risk is associated with A. Milton Friedman B. Harry Markowitz C. Steve Ross D. William Sharpe Answer: B Value-at-risk (VaR) answers the question: A. How much can be lost on a portfolio over a given time period? B. How much are actual losses on a portfolio over a given time period? C. What is the minimum loss expected on a portfolio over a given time period? D. What is the maximum loss expected on a portfolio over a given time period? Answer: D ____________curve is one in which the shorter-term yields are higher than the longerterm yields, which can be a sign of an upcoming recession. A. An inverted yield B. A Flat yield C. An upward sloping yield D. Efficient frontier Answer: A The term structure of interest rates refers toA. The relationships between interest rates and term to maturity. B. The idea that any long-term rate is the average of expected future short term rates. C. A general expectation of higher future interest rates. D. The idea that the terms of the bond may change as time to maturity changes. Answer: A Bank regulators use _______to set capital requirements for bank trading accounts because this models can be used to estimate the loss of capital due to market risk. A. VaR B. Benefit method C. Hedging D. None of these Answer: A _____ measures the degree to which an option’s value is affected by a small change in the price of the underlying instrument. A. Delta B. Gamma C. Vega REENOO707 D. Theta Answer: A Value-at-Risk (VaR) is a useful risk measure during _____ market conditions and over _____ horizons. A. normal; short B. abnormal; short C. normal; long D. abnormal; long Answer: A The CAPM is _________ factor model. A. Two factor model B. Three factor model C. Multi factor model D. None of the above Answer: D _____ is the difference between the expected rate of return on the market portfolio and the risk-free rate. A. Beta B. Market risk average C. Market risk premium D. VIX Answer: C Under M&M assumptions, the weighted average cost of capital(WACC) for a firm will remain _________regardless of the financial leverage. A. Fluctuating B. Varying C. Constant D. Sometimes vary sometimes constant Answer: C REENOO707 Essay: Identify major instruments to hedge interest rate risk. Explain at least two instruments to hedge this risk by providing suitable examples. Answer: Forward Contracts: Allows its buyers to lock in today the future price of an asset such as an interest-rate-linked security, a currency, a stock or a commodity. The buyer has to pay the agreed price on the settlement date, whether or not the price of the underlying asset has moved in his/her favour. Futures Contract: A futures contracts is simply a forward contract that traded on an exchange. Both Forward and Futures allows investors to protect open positions from adverse price movements. Swaps: A swap is an OTC agreement between two parties to exchange the cash flows of two different securities throughout the life of the contract. The most common form of interest swap is the fixed/floating interest rate swap, in which the fixed side pays a fixed interest rate on a notional amount and the floating side pays a floating rate on the amount. Call options: they are contracts that allow the buyer to purchase the underlying instruments (e.g., a particular bond) at a predetermined price( the striking or exercise price) during a given period or at maturity date. An option that can be exercised only on maturity is termed as ‘ European’ option. An option that can be exercised at any time during the maturity date (including the maturity date) is termed as an ‘American’ option. Call options give the buyer the right to exercise the option when the future price movement of the underlying bond or rate is favourable to the buyer. Put option: it is the opposite of a call option, it gives the holder the right to sell the underlying bond at a predetermined price, at any time up to (American put) or only at (European put) the maturity date. A huge number of strategies for hedging interest rate risks can be put in place by buying and selling call and put options at different exercise prices for different maturities. Buying a put and call with the same exercise price is called a straddle and represents a bet on increased volatility. Swaptions: options on swap, referred to as swaptions, represents the right to enter into a swap on or before a specified date at currently determined price. If the buyer of the swaption has the right to pay a fixed rate in the swap upon exercise, it is called a payer’s swaption. If the buyer of the swaption has the right to receive a fixed rate, it is called a receiver’s swaption. Such options may be structured with fixed and floating legs in different currencies. REENOO707 Exotic Options: Exotic options are a category of options contracts that differ from traditional options in their payment structures, expiration dates, and strike prices. The underlying asset or security can vary with exotic options allowing for more investment alternatives. Pricing and hedging exotic options relies on complex mathematical models. REENOO707
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