International Investment Management

International Investment Management

WORD LIMIT: QUESTION 01 +QUESTION 02=1400

International Investment Management

Question 1
Suppose the stock price for A.B.C Corp at 10 December 2020 is £9.35, the volatility is 0.21, the time to maturity is 1 year and the strike prices are K_2= £9.35, K_1=£7.74, calculate the premium for both put and call options using both strike prices (10%)
Suppose you have a long position in the stock on 10 December 2020. How would
you hedge against price declines for a one-year period, using puts, calls, and
combinations of options? Devise two different option strategies using puts, calls and combinations of options (30%)
Question 2
In October 2017 the yield on ten-year bonds issued by the government in a country was 2.1% (also the coupon rate). In November 2017, the yield was 1.6 %. Predict the effect of these changes in yield on the price of the ten-year government bonds, assume a face value, 1000. You will need to calculate the duration, modified duration, convexity and clearly explain your results. (30% of total marks)

Question 3

In no more than 400 words answer the following two questions:

Clearly explain why a long hedger position deteriorates when the basis strengthens unexpectedly and improves when the basis weakens unexpectedly? (15%)
The executive of a biscuit factory has told their treasurer “there is no point in our using wheat futures”. There is as much chance that the price of wheat in future will be less than the futures price, as there is that it will be greater than this price. Discuss the executive’s viewpoint, if you were the treasurer what would tell the executive (15%)

Refference:

Elton, E., Gruber, M., Brown, S. and Goetzmann, W., 2007. Modern Portfolio
theory and Investment Analysis. 7th ed. Wiley

Bodie, Z., A. Kane and A.J. Marcus Investments. Boston, Mass.; London: McGraw-Hill Irwin

Hillier D, S Ross, R Westerfield, J Jaffe and B Jordan (2016) Corporate Finance. 3rd European Edition. Maidenhead UK, McGraw-Hill Education.

Hull J. C. (2017) Fundamentals of Futures and Options Markets, 8th Edition, Harlow UK: Pearson. (other version will do too)

Databases for International Investment Management

Thomson Analytics (Datastream)

E-Journals

Journal of Business Finance and Accounting

Journal of Finance

The above Key Texts are complemented by additional reading from:

a. Book chapters and journal articles downloadable from myBU as selected by the Unit Tutors,

b. Monographs, journals and other sources, predominantly made available online located via the Library Catalogue, and

c. Relevant e-journal & e-book collections and other online databases.

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