ONLINE ASSESSMENT – OPEN BOOK TEST
This assessment replaces the end of year examination. It is a pre-seen open
book assessment and you may complete it in your own time, at any point up
to the submission date.
Please follow all instructions carefully.
 You may either type your answers into a word document or write your
answers by hand.
 If you write by hand, please either scan or take photos of your work for
submission. These should be saved as a single document for
submission.
 Please save the document in the style “ACFI3309 – Pnumber” e.g.
“ACFI3309 – P1234567”
 Submit your document by Turnitin if you have access. If you do not
have access, please contact your module leader
[email protected] for approval to submit by alternative means.
(note that your answer will still be uploaded to Turnitin by your module
leader)
 You may submit your answers at any time up to the submission date,
but you may not resubmit once your answers have been uploaded.
Submission date and time – Wednesday May 20 12:00 (noon)
There are two (2) questions, worth 50 marks each. Answer BOTH questions.
No formulae or tables are provided.
Maximum word count is listed against each question part where
applicable. This does not include any calculations.
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ACFI309
Open Book Assessment
Question 1 – Interest Rate hedging
Trader Mill Ltd requires a short-term loan to improve liquidity and anticipate
that they will need to borrow €5.6m for six months from the 1st of August (it is
now the 1st of April). Current interest rate on the market So is 4.37%. The
Finance Director has gathered information regarding possible hedges against
an interest rate increase:
(a) FRAs are available at a rate of 5%. What would the outcome of the
hedge be if, by the 1st August, the interest rate had moved to 3.5%?
(8 marks)
(b) If FRAs are available at a rate of 5%, what would the outcome of the
hedge be if, by the 1st August, the interest rate had moved to 5.5%?
(7 marks)
(c)Current Future price is 96.5 and the underlying bond size is €125K. In 4
month time, the interest rate So is 6.5% and future rate is 94. What
would be the outcome of the future hedge? (10
marks)
The Finance Director also consider to hedge the borrowing with interest
collar, given the information in the table below.
Strike
Price
Calls (%) Puts (%)
Mar June Sept Mar June Sept
93.50 0.46 0.53 0.63 0.14 0.92 1.62
93.00 0.25 0.34 0.41 0.28 1.15 1.85
92.50 0.11 0.17 0.23 0.49 1.39 2.10
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ACFI309
Open Book Assessment
(d) Describe the construction of an interest rate collar and assess the
impact it will have on the interest rate that a borrower may end up
paying. (Max word count is 100 words) (10
marks)
(e) Use 92.5 as Floor strike price (Kf) and 93.5 as Cap (Kc), Illustrate the
outcome of the collar hedge if interest rate at close out is 5.5%.
(15 marks)
Total 50 marks
Question 2 – Option Trading Strategies
Elliott Ltd (Elliott) is a financial institution that would like to invest in option
trading with share as underlying asset. Trader A of Elliott expects the share
price on the market will decrease in future; whereas the trader B believes
share price on the market will be quite fluctuated.
You are required to:
(a) List all option trading strategies can be applied based on Trader A’s
opinion. (4 marks)
(b) Draw pay-off diagrams for all strategies in question (a).
(6 marks)
(c) Design and complete pay-off table(s) for all strategies in question (a)
(10 marks)
(d) List all option trading strategies can be applied based on Trader B’s
opinion (6 marks)
(e) Draw pay-off diagrams for all strategies in question (d).
(9
marks)
(f) Design and complete pay-off tables for all strategies in question (d)
(15 marks)
Total 50 mark