Requires a series of clear and formal answer process, THANK U! 3. a) You are a producer of steel and need to purchase raw steel as input for your factory. You expect to spend 100,000 USD in five y...
3. a) You are a producer of steel and need to purchase raw steel as input for your factory. You expect to spend 100,000 USD in five years' time to purchase the raw steel. However, you also know that steel price is influenced by interest rates movements and that for 19% change in the risk free rate, the price of raw steel will change by 4.5%, what investment strategy can you use so that you can hedge the risk of interest rate movements? (60 MARKS) b) What happens to the price of a bond if interest rate volatility increase? Discuss the case for plain vanilla bond, callable, puttable and callable/puttable/exchangeable. (40 MARKS)
3. a) You are a producer of steel and need to purchase raw steel as input for your factory. You expect to spend 100,000 USD in five years' time to purchase the raw steel. However, you also know that steel price is influenced by interest rates movements and that for 19% change in the risk free rate, the price of raw steel will change by 4.5%, what investment strategy can you use so that you can hedge the risk of interest rate movements? (60 MARKS) b) What happens to the price of a bond if interest rate volatility increase? Discuss the case for plain vanilla bond, callable, puttable and callable/puttable/exchangeable. (40 MARKS)