Fixed Income and Derivative Securities (FIN358) is a course that focuses on the role these securities play in the overall financial markets. In particular, this course will cover the valuation, hedging, and issuing of fixed-income securities and derivatives.

In addition, FIN358 will provide students with an overview of the different types of fixed-income instruments that are available, as well as the benefits and risks associated with each one. By the end of the course, students should have a strong understanding of the role these securities play in the financial markets and how to value and hedge them.

Get SUSS FIN358 Fixed Income and Derivative Securities Course Assignment Answers in Singapore

Here, we discuss some assignment activities. These are:

Assignment Activity 1: Appraise the fundamentals of derivatives and their applications.

Derivatives are one of the fundamental tools in mathematical finance, used for pricing and hedging financial instruments. There are several types of derivatives, the most popular being options and futures. Derivatives are typically used to hedge risk or take on additional risk in order to generate higher returns. For example, an investor may purchase a put option on a stock as insurance against downside price movement. Similarly, a trader may buy a call option on a futures contract as a speculative bet that prices will rise.

The applications of derivatives are many and varied. Some of the more common uses include hedging ( mitigating exposure to adverse price movements ), speculation (taking significant positions in order to profit from expected price movements ), and arbitrage (taking advantage of differences in price between different markets). Derivatives can also be used for purposes such as managing interest rate risk, foreign exchange risk, and credit risk.

Assignment Activity 2: Value derivatives with pricing models and their variations.

Value derivatives are financial instruments whose payoff is derived from the value of an underlying asset. The most common types of value derivatives are forwards, futures, and options. Pricing models for value derivatives typically involve some combination of the following four factors: the spot price of the underlying asset, the risk-free interest rate, the dividend yield on the underlying asset, and volatility.

The most basic model for pricing a value derivative is the Black-Scholes model. The Black-Scholes model assumes that the underlying asset does not pay a dividend and that it will volatilize at a constant rate. While this model is elegant in its simplicity, it does not always price derivatives accurately.

One variation of the Black-Scholes model that does a better job of pricing derivatives is the Merton model. The Merton model takes into account the fact that many underlying assets do pay dividends. In addition, the Merton model allows for the volatility of the underlying asset to vary over time.

Another variation of the Black-Scholes model is the Bates model. The Bates model is similar to the Merton model in that it accounts for dividends and volatility, but it additionally takes into account the fact that many underlying assets are not traded on a continuous basis. The Bates model is therefore more accurate for pricing derivatives on assets such as stocks and commodities.

Assignment Activity 3: Formulate strategies to hedge interest rates, currency, equity, and other market risks.

With that said, there are a few different strategies that can be used to hedge interest rates, currency, equity, and other market risks. One option is to purchase derivatives, such as futures or options contracts, which give the holder the right but not the obligation to buy or sell an asset at a certain price on a certain date.

Another strategy is to invest in assets that are expected to hold their value even if the market crashes, such as gold or treasury bonds. By diversifying one’s portfolio across different asset classes, it’s possible to minimize the risk of losing money if one particular investment performs poorly.

Lastly, it’s important to keep in mind that no strategy can completely protect against losses in a volatile market – it’s always important to be aware of the risks involved and to only invest an amount of money that one is comfortable losing.

Assignment Activity 4: Assess and identify the risks and returns associated with fixed-income securities.

When it comes to fixed-income securities, there are a few key things to keep in mind in order to make informed investment decisions. The first is that, as with any type of investment, there is always some degree of risk involved.

Fixed-income securities can be affected by a number of factors including interest rates, the creditworthiness of the issuer, and overall market conditions.

That said, many investors find these types of investments attractive because they come with relatively low risk when compared to other options such as stocks. In addition, fixed-income securities typically offer relatively predictable returns which can be helpful for those looking to plan for their financial future.

When assessing the risks and returns of fixed-income securities, it’s important to consider one’s investment goals and objectives. For example, someone who is looking to generate a steady stream of income might be more willing to accept a lower return in exchange for less volatility. On the other hand, an investor with a higher tolerance for risk might be more willing to accept a higher degree of volatility in exchange for the potential for a higher return.

Assignment Activity 5: Compute the value of fixed-income securities and evaluate their risk and return.

To compute the value of a fixed-income security, one must first determine the security’s coupon rate and then discount this figure at the appropriate yield to maturity. The risk and return of a fixed-income security are two integral considerations when analyzing its potential value.

The coupon rate is simply the periodic interest payment made by the issuer of the bond; for instance, if a bond has a $1,000 par value and pays a 5% coupon, then the annual interest payment would be $50. To calculate the present value of this stream of payments, we need to discount it at an appropriate yield to maturity.

There are several different types of yields that can be used in this calculation, but for the sake of simplicity, let’s assume that we’re using the bond’s current yield. The current yield is simply the coupon rate divided by the market price of the bond; for our example security, a $1,000 bond with a 5% coupon paying semi-annual interest, the current yield would be 5%/($1,000/2), or 2.5%.

To calculate the present value of the bond’s interest payments, we would simply discount them at this yield to maturity: $50/(1+0.025)^1 + $50/(1+0.025)^2 + … + $50/(1+0.025)^10.

Assignment Activity 6: Calculate the value of fixed-income securities with embedded options.

Fixed-income securities with embedded options are slightly more complex to value than traditional fixed-income securities. This is because the presence of an option alters the cash flows associated with the security, which in turn affects the present value calculation.

To value security with an embedded option, one must first determine the type of option that is embedded in the security. The most common types of options are call options and put options.

A call option gives the holder the right, but not the obligation, to purchase the underlying security at a specified price on or before a certain date. A put option gives the holder the right, but not the obligation, to sell the underlying security at a specified price on or before a certain date.

Once the type of option is determined, one can use a variety of techniques to value the security. The most common approach is to use a lattice model, which involves constructing a series of cash flow scenarios and then discounting them back at an appropriate yield to arrive at a present value.

Assignment Activity 7: Use data technologies such as Excel or FactSet to create models for pricing and risk managing fixed income and derivative securities products effectively.

There are a variety of different data technologies that can be used to price and risk manage fixed income and derivative securities products. Excel is a popular choice for many because it offers a wide range of features and is relatively easy to use. FactSet is another popular choice, particularly for those who need more sophisticated modeling capabilities.

To create an effective model using either of these data technologies, one must first have a clear understanding of the financial instruments being modeled. This includes understanding the underlying cash flows, the expected volatility of the instruments, and the appropriate discount rates. With this knowledge in hand, one can then begin to build out a model that will provide accurate prices and risk management results.

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