Understanding Futures Contracts, Bond Ratings, Efficient Markets, CAPM, Mutual Fund Units, and Optio

Hedging against Price Fluctuations with Futures Contracts

1. Consider the following futures contracts: (1) silver, (2) corn, (3) oil, (4) Mexican peso. Explain what kinds of individuals or firms would be interested in using these contracts as a hedging vehicle. For each contract, you should identify one party who’d be interested in hedging against an upward move in the price and one party interested in hedging against a downward move in the price.
2. You are a newly hired analyst at one of the leading bond rating agencies, Standard and Poor’s. The first day on the job you are asked to rate the following bonds:
a. The bonds of an Internet start-up company
b. The bonds of a country with a history of inflation and political instability
c. The bonds of company operating a network of toll highways
d. The bonds of a company with a long illustrious history that has fallen on hard times
e. The bonds of a stable, rich country with no history of inflation Rank these bonds from highest credit quality to lowest credit quality and explain your ranking. [There are several defensible rankings. Your grade will be influenced by the quality of your reasoning as well as the adequacy of your ranking.]
3. What would happen if everyone believed the market was efficient and didn’t bother to do any research or analysis of stocks. In other words, they just bought a diversified portfolio and held it for the long-run. Would the market still be efficient? Why orwhy not? What does this say about the efficient markets
hypothesis?
4. CAPM says the best way to invest in the stock market is to invest in a diversified portfolio of stocks. Design a diversified portfolio with 7 stocks. Explain why the stocks you chose are sufficiently diversified to satisfy the requirements of CAPM. Calculate the return on your portfolio over the past 12 months. Compare it to the return on the S&P500 index. In hindsight, which one should you have put your money in and why?

5. Two years ago, you bought 1,000 units of a new mutual fund at a price of $10 each. To start, the fund raised a total of $100 million; it has an MER of 2.5%. In the first year, the fund manager made $12 million in gross investment income for
the fund. At the start of year 2, investors bought another 1 million units and the current NAV. During the second year, the portfolio manager made a total of $14 million in gross investing profits. How much can you sell your units for (approximately) at the end of year 2? (Make sure to show your calculations and explain them so that the reader understands them).
6. The price of AAPL $307.71 on May 15, 2020. You decide to implement an option strategy by selling a call on 100 shares at an exercise price of $340 dated September 18, 2020 for $9.79 and at the same time, selling a September 18, 2020 put at $270 for $12.00. (You can look up current data on http://finance.yahoo.com ).
a. How much cash do you get now?
b. What are you betting AAPL stock will do over the next 4 months?Explain.
c. Is this a position you would take yourself? Why or why not? Ay 1/20
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