Problems From Investment Analysis and Portfolio Management
Provide answers to the following problems from Ch. 21 of your Investment Analysis and Portfolio Management text:
You must use excel and all calculations must be shown
Problem 2 on p. 885
Problem 8 on p. 887
Provide answers to the following problems from Ch. 23 of your Investment Analysis and Portfolio Management text:
Problem 2 on p. 985
Provide answers to the following problems from Ch. 24 of your Investment Analysis and Portfolio Management text:
Provide answers to the following problems from Ch. 21 of your Investment Analysis and Portfolio Management text: Problem 2,8
2. You are a coffee dealer anticipating the purchase of 82,000 pounds of coffee in three months. You
are concerned that the price of coffee will rise, so you take a long position in coffee futures. Each
contract covers 37,500 pounds, and so, rounding to the nearest contract, you decide to go long in
two contracts. The futures price at the time you initiate your hedge is 55.95 cents per pound. Three
months later, the actual spot price of coffee turns out to be 58.56 cents per pound and the futures
price is 59.20 cents per pound.
a. Determine the effective price at which you purchased your coffee. How do you account for the
difference in amounts for the spot and hedge positions?
b. Describe the nature of the basis risk in this long hedge.
8. An investment bank engages in stock index arbitrage for its own and customer accounts. On a particular day, the S&P index at the New York Stock Exchange is 602.25
when the futures contract for
delivery in 90 days is 614.75. If the annualized 90-day interest rate is 8.00 percent and the (annualized)
dividend yield is 3 percent, would program trading involving stock index arbitrage possibly
take place? If so, describe the transactions that should be undertaken and calculate the profit that
would be made per each “share” of the S&P 500 index used in the trade.
Provide answers to the following problems from Ch. 23 of your Investment Analysis and Portfolio Management text:
• Problem 2 on p. 985
CFA Examination Level II
To protect the value of the Star Hospital Pension Plan’s bond portfolio against the rising interest
rates that she expects, Sandra Kapple enters into a one-year pay fixed, receive floating U.S. LIBOR
interest rate swap, as described in the following table.
U.S. LIBOR Interest Rate Swap Terms
1-year Fixed Rate (annualized) 1.5%
90-day U.S. LIBOR Rate [L0(90)] (annualized) 1.1%
Notional Principal $1
Day Count Convention 90/360
Note: Li(m) is the m-day LIBOR on Day i.
Sixty days have passed since initiation of the swap, and interest rates have changed. Kapple is concerned
that the value of her swap has also changed. The U.S. LIBOR term structure and present
value factors of interest rates are described in this table:
U.S. LIBOR TERM STRUCTURE AND PRESENT VALUE FACTORS
(60 DAYS AFTER SWAP INITIATION)
U.S. LIBOR Term Structure (annualized) Present Value Factors
L60(30) 5 1.25 percent 0.9990
L60(120) 5 1.50 percent 0.9950
L60(210) 5 1.75 percent 0.9899
L60(300) 5 2.00 percent 0.9836
Note: Li(m) is the m-day LIBOR on Day i
Calculate the dollar market value of the interest rate swap entered into by Kapple, at 60 days after
the initiation of the swap and using a $1 notional principal. Show your calculations.
Note:Your calculations should be rounded to 4 decimal places.
Provide answers to the following problems from Ch. 24 of your Investment Analysis and Portfolio Management text:
• Problem 4 on p. 1037
CMD Asset Management has the following fee structure for clients in its equity fund:
1.00% of first $5 million invested
0.75% of next $5 million invested
0.60% of next $10 million invested
0.40% above $20 million
a. Calculate the annual dollar fees paid by Client 1, which has $27 million under management, and
Client 2, which has $97 million under management.
b. Calculate the fees paid by both clients as a percentage of their assets under management.
c. What is the economic rationale for a fee schedule that declines (in percentage terms) with increases
in assets under management?
You must use excel and all calculations must be shown
