need answer to those questions from 2-bonus

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Question 1: Interest Rate Swap [10 points] The fixed-for-floating swap contract has the following provisions: Notional amount: $500 million Floating rate: 6-month Libor The counterparties can borrow and lend at Libor Maturity: 2 years Determine the fixed annual swap rate contract given the following information about the term structure:

r.5 .5f.5 .5f1 .5f1.5 .5f2 1.30% 1.50% 1.80% 2% 2.25%

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Question 2 (10 points). For the following two questions use the table of swap rate quotes below 1. (5 points) ABC Corp. issued in the past a floating rate bond that is reset every half year; it will mature in 3 years and it pays LIBOR +70 b.p. ABC Corp. management wants to convert the bond into fixed rate instrument WITHOUT retiring the floating-rate bond. What will be the three year fixed rate that ABC Corp. can “lock into”? 2. (5 points) The XYZ Corp. can borrow 7Y money at LIBOR +120 b.p. or at 7.5% fixed. The company wants to borrow at fixed rates. Find the cheapest way to achieve it.

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Question 3[20 points] For next four questions use the following assumptions.

The risk-free rate is 1%. The expected market premium is E(MktRf) = 5.00%, the size premium is E(SMB) = 3.60%, the value premium is E(HML) = 7.36%, and the momentum premium is E(UMD) = 8.00%. Assume past and future market volatility is 20%. All numbers above are annualized. In addition, suppose that you estimate CAPM and Carhart 4-factor regressions using the daily excess returns of Netflix stock (ticker: NFLX) using the past 1 year of daily return data. The output of these regressions is provided below. 4-Factor Model: 3 Fama-French factors (MktRf, SMB, HML) and the momentum factor (UMD) 1-Factor Model: Only MktRf MS Excel gives you the following regression statistics for the two regression models:

Regression Coefficients

Intercept MktRf SMB HML UMD Std Dev of Error R 2

4-Factor Model

0.00% 0.40 0.00 –0.50 –0.80 1.91% 14.3%

1-Factor Model

–0.04% 0.40 2.00% 6.0%

All coefficient estimates above, except the SMB coefficient, are statistically significantly different from zero at the 5% level. 1. What is NFLX’s annualized expected return according to the Carhart 4-factor model? Show your work

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2. What was NFLX’s CAPM annualized alpha during the past year? Show your work 3. What Sharpe ratio could you obtain by combining NFLX with the market? Show your work 4 Based on its factor exposures alone, which statement below most accurately describes NFLX? Choose among the following and motivate your choice in a few sentences : a. It is a large capitalization stock with high past 1-year stock returns b. It is a small capitalization stock with low past 1-year stock returns c. It is a value stock with low past 1-year stock returns d. It is a growth stock with low past 1-year stock returns e. None of above Explain your answer

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Question 4 [ 10 points] An investor bought a share of Google for $80 on the date of its Initial Public Offering (IPO); simultaneously , he acquired a long put

with strike $50 ; a long call with strike $100 and two short calls with strike 120.

1. [ 5 points] Plot the payoffs of a “stock and options” portfolio as a function of the stock price a year after the IPO.

2. [ 5 points] Assume that interest rate is 10% and Google’s price volatility is 45%.

Calculate the cost of acquiring the “stock and options” portfolio at the IPO date

and its payoffs a year after the IPO if Google stock was trading at $400 a year

after the IPO. [Use the clickable pricing spreadsheet]

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Question 5 [ 10 points] In next two questions , suppose Amazon stock is currently selling at $200 per share; and the 1-year risk-free rate is 0%. An at-the-money 1-year put on Amazon is selling at $30. 1. What is the no-arbitrage price of an at-the-money 1-year call option on Amazon? 2. Assuming Amazon stock’s volatility is constant at the level expected by investors, how many shares of stock would you need to buy to replicate the 1- year call?

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Question 6 [ 15 points] For the following three questions consider three 3-month American call options with strike prices of $75, $80, and $85 and market prices of $8.99, $6.37, and $4.37, respectively. The stock underlying these options is priced at $80 and pays no dividends. Suppose the risk-free rate is 0%. 1. [ 5 points] Based on the options’ implied volatilities in the Black-Scholes model, investors seem to expect: a. The stock price will be log-normally distributed in 3 months b. There is a greater than lognormal probability of extremely good news c. There is a greater than lognormal probability of extremely bad news d. There is a greater than lognormal probability of extreme good and bad news e. None of above Explain your answer

2. [ 5 points] If the stock’s market beta is 1.0, which of the three call options has the highest market beta?

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3. [ 5 points] If the stock’s alpha is 2% per year, what is the alpha of the call option with a strike price of $75?

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Question 7 [ 15 points] Given: the value of assets of XYZ corp. will be either $2.2 B or $1.6 B in a year from now. XYZ issued some time ago a zero-coupon with face value of $2B; the bond will mature a year from now. XYZ Corp. has now an opportunity to invest $100MM into a project with a certain [i.e., risk-free] PV=$200 MM and NPV=$100MM. If investment is made, the value of XYZ assets next year will be either $2.42 B or $1.82 B ; Assume that value of XYZ’s assets was $1.7B before the investment and that the risk free rate is 10% P/A [annual compounding]. Calculate the value of XYZ equity before and after the additional investment of $100MM. Will stockholders provide the $100 MM needed for this very profitable project? Assuming that stock holders refuse to add any new funds, should the existing bondholders provide additional $100MM financing? Explain.

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Question 8 [ 10 points] Consider the following data: The current price of a stock is S0=$50; a European call option with X= 50 and T= 3 months is trading for $0.7 ; a European put option with X= 50 and T= 3 months is trading for $2; and the risk free rate is 0% . Assume that you are not allowed to sell short [to write ] call options but you can short any other traded asset. Detect an arbitrage opportunity and construct the trading strategy to exploit this opportunity. Show how the trading strategy generates a profit.

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Question 9 [ 10 points] Use the CAPM model to fill in the blanks in the following table:

ASSETS beta Expected return variance covariance

with the market

Market Portfolio 0.10

Risk Free rate 0.02

Stock 1 0.5 0.25 0.1 Stock 2 0.1 0.29

Show your work

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Bonus Questions [ 20 points; do not use the option calculator for this question] Suppose that Saks Inc (ticker: SKS) stock is initially priced (i.e., today) at $10 and will either increase by 25% or decrease by 20% in each of two 3-month periods. The stock pays no dividends. Consider an exotic European option based on SKS stock that expires in six months. If exercised at expiration, the option has a payoff equal to SKS’s stock price squared. For example, if the option is exercised when SKS is priced at $10, its payoff is 102 = $100. Assume the six- month T-Bill rate is 0%. a. Using whichever method you prefer, compute the values of the exotic SKS option under both possible stock price scenarios that might occur 3 months from now [i.e, use a two step binomial tree and calculate value of call option in states Sd and Su] b. Using whichever method you prefer, value the exotic SKS option in today. (When stock price is S0 ) c. Compute the delta of the SKS option today.