BFW2751: Nancy Lim a financial analyst, is looking for your guidance regarding her new investment portfolio, which is worth $2 million: Derivatives 1 Assignment, MUM, Malaysia

Question 1

Nancy Lim a financial analyst, is looking for your guidance regarding her new investment portfolio, which is worth $2 million. The department intends to invest the amount for a period of three months, starting from July 1st until October 1st. The fixed annual rate for the investment for 3 month period is 5.10%, 4 months is 5.6% and 5 months is 6.7%. In the past months, you were informed about the uncertainty of the floating rate. The investment period day count convention is 92 days and for FRA pricing, the actual/360 convention is used. On 1st July, the FDA predicted a Libor rate of return of 5.30% per annum.

You are required to calculate and identify the highest net interest revenue for the above investment based on the following interest rate hedge instruments,

1. FRA contracts
2. Eurodollar Futures contract
3. Bank Accepted Bills Futures contracts

Question 2

According to a soybean farmer, they do not utilize futures contracts for hedging as their primary concern is not the price of soybeans, but the potential destruction of their entire crop due to weather conditions.

1. What is your viewpoint regarding this approach?
2. Do you believe that the farmer should estimate their expected soybean production and utilize hedging to secure a price for the anticipated yield? Under what circumstances is hedging considered preferable?

Question 3

Answer

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