Complete post-module assignment for the course Derivatives Markets including futures and options. The attachments are NOT the assignment. It is the in-class exercises/cases and the assignment will be...

Answer 1
Marking to Market risk in futures and options contracts
(b) is mainly due to interest rate risk
Reason: because as per change in interest rate, the value of future and option changes due to discounting the expected cash flows associated with it.
Answer 2
Assume that the 3-month Hang Seng Index futures contract settled exactly at the index level, the 3-month risk-free rate is 1.50% (annually) and the annual dividend yield on the index is 2.00%. The round trip transactions costs, for a
itrage, are 0.1% of the index. These values imply the following a
itrage strategy
(d) bo
ow funds, buy the index and sell futures
Reason: Since, the dividend yield is higher than the risk free rate, the fair value of future will be less than index value and hence, to make an a
itrage profit, the strategy would be bo
ow funds, buy index and sell future.
Answer 3
Mexico and Peugeot (the car company) have been facing market price risk which affected their revenues.  To deal with this risk
Not clea
Answer 4
Basis risk
(c) is zero if the optimal hedge ratio (h*) is 1.0
Reason: Basis risk arises due to imperfect hedging or mismatch in hedging position. So, if hedge ratio is 1.0 there would be perfect hedging and the basis risk will be eliminated.
Answer 5
(b) subject to “rollover” risk and MTM risk
Reason: Stack hedging is a strategy which involves buying various futures contracts that are concentrated in nea
y delivery months to increase the liquidity position. Here the most nea
y and liquid contract is used, and it is rolled over to the next-to-nearest contract as time passes. Therefore, it is subject to “rollover” risk and MTM risk
Answer 6
Assume that the March 2021 futures contract on SPX settled at 3695, r = 0.24%, q = 1.67%, a
itrage transactions costs (TC) are 1.16 index points. The TC band is [3689.59, 3691.91]. Thus, the Fair Value of the Futures contract is
(e)
First find F*, compute 3,689.59 + 1.16 = 3,690.75
Thus, S = F*/e((.0024-.0167)/(365/127)) = 3,690.75*0.9950 = 3672.30
Answer 7
An increase in domestic interest rates (ceteris paribus)
(b) should raise the price of an FX forward contract
Reason: cost of ca
y as the interest cost of a similar position in cash market and ca
ied to maturity of the futures contract, less any dividend expected till the expiry of the contract.
Futures price = Spot price + cost of ca
y
Therefore, on increasing the domestic interest rate, the price of forward contract will also rise.
Answer 8
Assume that the risk minimizing cross-hedge ratio (h*) is 1.0 and the co
elation coefficient, ρρ(DS, DF), is 1.0. The cash-flow risk per unit, σσh*(π) = 0. σσ(DF) must be equal to (assume it is a forward contract, no marking to market risk)
(a) Zero
Reason:
 (DS)/  (DF) = 1/1 = 1
It means,  (DF) =  (DS)
 h*(π) = 0 =  (DS) (1 – (1)2)1/2,   (DS) = 0
Therefore,  (DF) = 0
Answer 9
The cost-of-ca
y for the S&P500 index (SPX) futures
(b) equals all costs and benefits associated with ca
ying the futures contract to expiration
Reason: Cost-of-ca
y refers to the cost of holding the asset till the futures contract matures. This could include storage cost, interest paid to acquire and hold the asset, financing costs etc.
Answer 10
Assume that the cost of ca
ying silver includes storage costs. Assume that the March 2021 futures contract traded at $ 25.92 per ounce, the July 2021 futures contract Traded at $ 25.99 (assume there are exactly 4 months apart). Storage costs per ounce are about 0.46% of the March 2021 futures contract value, annually. Therefore, the implied annualized forward interest rate is about
Ans (b) -0.81%
Storage cost    =    0.0046*25.92
        =    0.1192
25.92*(1+r)0.33 = 25.99 – 0.1192
25.92*(1+r)0.33 = 25.8708
(1+r)0.33 = 0.9981
1 + r = 0.9943
R = -0.0081
Answer 11
(a) is subject to mark-to-market risk
Reason: Because both contract are different despite of same delivery...