What factors must one consider when deciding on the appropriate underlying asset for a hedge?

Submission Date by students: 13 Nov 2022-11:59 PM
Place of Submission: Students Grade Centre via blackboard.
Marks: 10 Marks

Q1. Assume that there is a forward market for a commodity. The forward price of the commodity is $50. The contract expires in one year. The risk-free rate is 10 percent. Now, six months later, the spot price is $60. What is the forward contract worth at this time?

Q2. What factors must one consider when deciding on the appropriate underlying asset for a hedge?
Q3. Consider a $40 million notional principal interest rate swap with a fixed rate of 7.5 percent, paid quarterly on the basis of 90 days in the quarter and 360 days in the year. The first floating payment is set at 7.9 percent. Calculate the first net payment and identify which party, the party paying fixed or the party paying floating, pays.
Q4. Discuss the Interest rate swaption/Swaption and its types?

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