1

Mid-Session Exam

The midsession exam will take place during the lecture time in week 6 starting at 8:30am.

You need to bring your student ID and calculator to the exam. Exam format: MC questions (1 mark for each question) and

long questions Duration: 2 hours including reading time.

2

Reading List

Textbook:

Ch. 1: 1.1-1.10

Ch. 2: 2.1-2.9, 2.11

Ch. 3: 3.1-3.5

Ch. 5: 5.1-5.13

Lecture notes from week 1 to week 4

No questions on swap

3

Revision for mid-session exam

Fundamentals of futures and forward contracts

Definition of futures and forward contacts

Difference between futures and forward contracts

Payoffs from forward contracts

Daily settlement and Margin requirements

Trading on futures contracts

Type of traders and their objectives

Specification of a futures contract

Open interest and trading volume

4

Revision for mid-session exam

Pricing futures contracts

Spot, forward, & futures prices and expected spot price in the future.

Is futures price the same as forward price?

Value of a long forward contract

Cost-of-carry relations for different underlying assets

Arbitrage opportunity (strategies and risk-free profits)

5

Revision for mid-session exam

Hedging with futures

Basis and Basis risk

determining futures (long or short) positions and number of contracts

• Mismatched maturity

• mismatched underlying asset

• Tailing hedging when using futures

Estimation of hedge ratio

Evaluation of hedging effectiveness (effective price and net gain/loss)