FINANCE COURSEWORK

Finance Coursework



Finance Coursework

Section A

Question 1

Part a - i)

Weight 1 = 80 %

Expected Return = 9.4 %

Variance = 0.0032

Standard Deviation = 5.66 %

Part a - ii)

Weight 1 = 80 %

Expected Return = 9.4 %

Variance = 0.0064

Standard Deviation = 8%

Part a - iii)

Weight 1 = 80 %

Expected Return = 9.4 %

Variance = 0

Standard Deviation = 0%

In above parts we evaluate all the portfolios individually and it is clear that the portfolio AD is the best among other portfolios as its standard deviation is 0% and the return same as other portfolios.

Question 2

Part a)

Effective quarterly interest rate = r = [1 + (i/n)]n - 1

Effective quarterly interest rate = 5.655 %

Part b)

£ 6119.29 is the quaterly payment that is needed to be paid. The total amount is £ 36715.74.

Part c)

Amortisation Table

Pmt #

Principal

Interest

Balance

1

£5634.63

£484.66

£29365.37

2

£5712.65

£406.64

£23652.72

3

£5791.76

£327.53

£17860.96

4

£5871.96

£247.33

£11989.00

5

£5953.27

£166.02

£6035.73

6

£6035.71

£83.58

£0.02

Question 3

Part a)

The future of the price Frozen Orange Juice is not correct because the spot price is £0.5 per kilo and future is £0.42 per kilo, the future price is always higher than the current price. Same is the case with Stock Market Index.

Part b)

A futures contract is a contract to buy (and sell) a specified asset at a fixed price in a future time period. There are two parties to every futures contract - the seller of the contract, who agrees to deliver the asset at the specified time in the future, and the buyer of the contract, who agrees to pay a fixed price and take delivery of the asset. If the asset that underlies the futures contract is traded and is not perishable, you can construct a pure arbitrage if the futures contract is mispriced. In this section, we will consider the potential for arbitrage first with storable commodities and then with financial assets and then look at whether such arbitrage is possible.

            The basic arbitrage relationship can be derived fairly easily for futures contracts on any asset, by estimating the cash flows on two strategies that deliver the same end result the ownership of the asset at a fixed price in the future. In the first strategy, you buy the futures contract, wait until the end of the contract period and buy the underlying asset at the futures price. In the second strategy, you borrow the money and buy the underlying asset today and store it for the period of the futures contract. In both strategies, you end up with the asset at the end of the period and are exposed to no price risk during the period in the first, because you have locked in the futures price and in the second because you bought the asset at the start of the period. Consequently, you should expect the cost of setting up the two strategies to exactly the same. Across different types of futures contracts, there are individual details that causes the final pricing relationship to vary commodities have to be stored and create storage costs whereas stocks may pay a dividend while you are holding them.

Part c)

There have been 3 hypotheses to explain the price ...