SECTION A

Question 1

(a) The table below shows the data relating to two call options. The AYE call expiring in 6 months is correctly priced.

Appraise whether the PIE call expiring in 6 months is consistently priced in relation to the AYE call expiring in 6 months.

If there is insufficient information available to determine the consistency in the pricing of the calls, give your reasons.

(b) (i) You are a gold trader looking for arbitrage opportunities. The spot price of gold is currently $1,800 per ounce. The futures contract price for delivery in 6 months is $1,850. Storage cost is fixed at $10 per ounce for 6 months.
Appraise and value (compute) the borrowing cost above which arbitraging the
two prices are not profitable.

(ii) If you were to formulate a strategy to hedge the gold inventory, would you agree with the jeweler who made the following remark?

“I’ve hedged my inventory of gold with gold futures contracts, so my inventory is perfectly hedged against changes in gold prices.”

Question 2

Assess the risks and returns of green bonds. How are green bonds different from regular bonds? Discuss the attractiveness of green bonds for investors.

Question 3

(a) The diagram below shows a binomial tree for a 6.5% coupon bond based on an interest rate volatility of 10%.

Create a model (use an Excel spreadsheet) and compute the price of the bond.

(b) Suppose the bond above is now callable at only time 1 and time 2 at prices of 102 and 101, respectively. Calculate the price of the call option associated with the bond.

(c) Discuss your answer in part (b).

(d) If the bond is more convex than it is presently, assess the impact on your answer to part (b).

SECTION B

Based on Question 2, prepare a video recording of the presentation of at least 3 minutes but not exceeding 6 minutes. In this presentation, imagine you are a private wealth manager who is presenting to a client on a new investment vehicle, namely green bonds.

In particular, you will articulate what green bonds are, why and how they are different from conventional bonds, their risks and returns, and finally, why they would be a suitable addition to the client’s portfolio. There are two methods for ECA video assignment submission; either Record Media or Upload Media. For Upload Media, please note that your file size should be no more than 500MB and the format is in .mp4.

SECTION C

Prepare a set of PowerPoint presentations upon which the video presentation is based. Please note that the PowerPoint must be converted to PDF before submission to Canvas.