1. Answer the following questions based on the following quotation, which is October 1 price quotation on light sweet crude oil (source: New York Mercantile Exchange).
|
|
Last
|
Open
High
|
Open
Low
|
High
|
Low
|
Most Recent
|
Change
|
|
Nov 2007
|
80.25
|
81.55
|
81.45
|
82.02
|
79.45
|
80.24s
|
0.01
|
|
Dec 2007
|
79.28
|
80.35
|
80.3
|
80.8
|
78.5
|
79.28s
|
0.00
|
|
Jan 2008
|
78.44
|
n/a
|
79.58
|
79.9
|
77.75
|
78.50s
|
-0.06
|
|
Feb 2008
|
77.68
|
n/a
|
78.85
|
78.86
|
77.22
|
77.87s
|
-0.19
|
|
Mar 2008
|
77.32
|
n/a
|
78.25
|
78.62
|
76.75
|
77.34s
|
-0.02
|
|
April 2008
|
76.83
|
n/a
|
77.61
|
77.61
|
76.28
|
76.86s
|
-0.03
|
(a) Here the futures price is lower the greater the time to expiration; what does this imply about the convenience yield of oil? Specifically, is it greater than the cost of carrying oil? (Hint: carry cost model).
(b) The trading price of Nov 07 $80.25 is close to the spot price and thus we will use this as measure of spot price. Assuming a risk-free rate of 5% and storage cost of 1%, what is the implied convenience yield for Dec 07 futures, based on the carry cost model? There is approximately one month till expiration.
(c) The delivery of the underlying oil can be made any day during the delivery month. If you are in a short position and you are scheduled to deliver the oil, should you deliver as early as possible or as late as possible? Briefly explain.
(d) Suppose that you are a manager of a utility firm and you are very concerned about oil price increase before January. What position (short or long) should you take in oil futures to hedge this risk?
(e) Suppose again you are the manager described in (d), how would you use call options on oil as insurance for potential price increase? Be sure to mention whether you should take long or short position.
2. Assume that the following interest rates at which firms A and B can borrow:
Fixed rate Floating rate
Firm A 8% LIBOR + 1%
Firm B 9% LIBOR + 1.4%
Premium paid by B over A 1% 0.4%
Also assume that A ultimately wants a floating rate loan while B wants a fixed rate loan. Design an interest rate swap so that both can benefit, assuming that no swap bank is involved.
3. Discuss factors influencing the value of call options and the relationship between each of the factors and option value; you do not need to specify the relationship with an equation; it is sufficient to state a positive or negative relationship and briefly explain why.