FINANCIAL MARKETS

Financial Markets



Financial Markets

Part A

Question 1

Interest rate risk is the probability of a negative impact on the profitability or value of assets as a result of changes in interest rates. Interest rate risk affects many organizations, both borrowers and investors, and especially affects the capital-intensive industries and sectors.

The changes affect borrowers through the cost of funds. For example, a corporate borrower uses the floating debt of the interest rate is exposed to higher interest rates could increase the costs of the fund company. ATIPS AND TECHNIQUES portfolio of fixed income securities has exposure to interest rates either through changes in performance and gains or losses on assets held.

Question 2

Forward contracts the position of the hedge position from short to long futures contract arbitration micro macro hedge cross ratio on the risks of stock market risk of the insurance holding company's president is concerned the effect of interest rate changes on rate sensitive assets and liabilities. Have presented an analysis of both income and duration gap of the company and how changes in the market value of equity of the bank. This presentation made clear that the bank has to protect itself from an adverse change in the market value of equity. Based on economic forecasts, it is likely that interest rates will rise over the next six months. As a result of the excellent work presented to management on gap analysis, which have been called back to present alternatives to manage the inherent risk (Elton, 31).

Question 3

Futures contract would be around 1.3 and that interest rates in exchange for the assets covered on average for a given change in interest rate futures contract at about 0.90. Hedging is a risk reduction strategy in which investors and traders take positions in an instrument to reduce their risk profile. The general practice is to take a little long and a short position in an instrument and thus generally requires the use of financial derivatives that can be sold short. Hedging strategies are also employed by professional fund managers to control risk exposure of large managed funds. In this context, the coverage is a more complex process since it involves a total investment portfolio in different - each with its own unique risk / return. Futures contracts can be a useful hedge.

Question 4

If bonds are sold at par, is said to have sold 100, which means they are selling for 100 percent of face value. If the bonds sold for 98 and a half have been sold at a discount, in this case the 98 ½ percent of its nominal value. Bonds sold at a premium to sell for an amount greater than 100 as 101 ¼. As bond prices fall, is sold for less than face value, the exchange rate rises above reasons. On the contrary, as rising bond prices, the rate of return falls. The bonds are registered in the name of the person who purchased them. The registered owner receives the interest on the interest payment date (Merton, ...