NATIONAL

UNIVERSITY

OF

SCIENCE

AND

TECHNOLOGY

FOCULTY OF COMMERCE
DEPARTMENT OF BANKING
MASTER OF SCIENCE DEGREE IN BANKING AND FINANCIAL ECONOMICS
NAME OF STUDENT

AARON KUUDZEREMA

STUDENT NUMBER

N01522588D

ADDRESS

NSSA HOUSE, KARIBA

TELEPHONE

0261 2145210

CELLPHONE

0773 501 255/0712 289 276

EMAIL

kuudzeremaa@nssa.org.zw;
akuudzerema@gmail.com

SUBJECT

CBA 5101: FINANCIAL MARKETS

AND REGULATION: INDIVIDUAL
ASSIGNMENT 1

YEAR/SEMESTER

YEAR 1 SEMESTER 1:1

Question 1
1

(1) Profit/Loss =
(Spot rate- future rate) x value of contract x number of contract.
Therefore as at 1 March
US$4,000,000.00 = 2,500,000.00
Number of contracts available =

1,600

2,500,000.00
25000

= 100 contracts

Number of contracts to purchase US$4,000,000.00 = 100contracts

Profit/loss as at March 1 =
=

(1.6149-1.600) x 25000 x 100

US$37,250.00

Profit /loss as at May 10

Firstly we calculate futures contract in pounds, which is equals to
US$4,000,000.00
25000

2,544,529.00

Therefore number of contracts =

2,544,529.00
25000
=
102 contracts
Profit/loss as at May 10

=
=

(1.5850-1.5720) x25000 x 102

UD$33,150.00

(11)

Hedge Efficiency Ratio

Change in spot price/selling price

Change in future price/purchase price

1.580-1.6149
1.5720-1.600

-0, 0299
-0,028

=
1, 0679
Question 2
(a) Bull call spread
2

Buying a call option on the stock of XYZ ltd with a strike price of 4100 at $170.45
and selling the call option on the same stock of XYZ ltd of 4400 at $35.40.
(b) (1)
Maximum loss or risk occurs below 4100 (the lower strike) and is the net debit
paid.
Therefore risk
=

=
$170.45-$35.40
$135.05

(11)
Maximum profit or reward occurs above 4400 (the higher strike and is the
difference between the strikes (4400-4100) less net debit to enter the trade.
Therefore profit
=
=

=
($4400-$4100) ($170.45-$35.40)
$300-$135.05
$164.95

(111)
Breakeven point
=
Lower strike price + net debit
=
$4100 + ($170.45-35.40)
=
$4100 + 135.05
=
$4,235.05

(c)

$
3500.

Net pay off

from call (buy)
-170.45

Net pay off from

call (sell)
35.40

Net pay off

-135.05
3

00
3600.
00
3700.
00
3800.
00
3900.
00
4000.
00
4100.
00
4200.
00
4235.
05
4300.
00
4400.
00
4500.
00
4600.
00
4700.
00
4800.
00

-170.45

35.40

-135.05

-170.45

35.40

-135.05

-170.45

35.40

-135.05

-170.45

35.40

-135.05

-170.45

35.40

-135.05

-170.45

35.40

-135.05

-170.45

35.40

-135.05

-35.40

35.40

+29.55

35.40

64.95

129.55

35.40

164.95

229.55

-64.60

164.95

329.55

-164.60

164.95

429.55

-264.60

164.95

529.55

-364.60

164.95

(d)

35.40

ST
4100

4235.05

4400

-170.45

Maximum profit
Maximum loss
Breakeven

$164.95
$135.05
$4235.05