April 2021

Hello,

Can someone help in clarifying these questions from April 2021 session?

Q4- part v)

The term of risk free rates given isn't very clear to me. For calculating forward price for 2 year forward, are we assuming that risk free rate is for 2 year period and not as at given date? In the accumulation factor, I was assuming 1.2% for year 1, 1.3% for year 2 and so on until I looked at the solution.

Also, when calculating total profit/loss on each forward, the final step is giving me a different answer. For example, for 1 year forward, total profit=

2.76 (same as Examiners report) *1500000 (number of forward contracts purchases, assuming 1 metric tonne per contract)= 4140000
but the solution in the report is 4134940. Am I missing something?

Similar concern with 2 year and 3 year contracts.

Thank you!

 

Q2.

part iv)

The formula quoted in Core Reading for xd adjustment is

xdi,t = (Di,t * N i,t )/B(t-1)

I could not follow the definition of B(t-1).

This part of the question is a direct application of core reading but why is B(t-1)= (2050/1000) here? Why would we consider the whole market capitalisation (2050 vs only 450 for company 2 and 5) when we are calculating xd adjustment only for 2 companies? Understanding the meaning of B(t-1) should answer this I suppose. Please help.