3. A US company knows it will have to pay 50 million Yen in three months to a supplier. The current exchange rate is 0.1500 Dollars per Yen. Discuss how forward and options contract can be used by the company to hedge its exposure to exchange rate risk.
4. A portfolio manager has maintained an actively managed portfolio with a beta of 0.5. During the last year, the risk free rate was 2.5% and equities performed very poorly providing a return of -20%. The portfolio manager produced a return of -10% and claims that in the circumstances it was a good performance. Discuss this claim.
5. A bank can borrow or lend at LIBOR. Suppose that the six-month rate is 5% and the nine-month rate is 6%. The rate that can be locked in for the period between six-months and nine-months using an FRA is 7%. What arbitrage opportunities are open to the bank? Assume continuously compounded rates. Define what FRA is in this context.