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Question 5 a ) Analyse the pros and cons of using forward contracts versus options...

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Question 5 a ) Analyse the pros and cons of using forward contracts versus options contracts for hedging purposes. (12 marks) (b) (1) You are offered the following two bonds. Maturity Bond rating Coupon YTM Par value Bond A 3 years AAA 4% Bond B 6 years AAA 3% 5% 6% 100 100 Assume the yield curve is upward sloping. Suppose Bond A is correctly priced. Analyse Bond B to determine whether it is consistently priced in relation to Bond A. (4 marks) (ii) You are offered the following two bonds. Bond C 5 years AAA 2% Bond D 10 years AAA Maturity Bond rating Coupon YTM Par value 3% 2% 4% 100 100 Assume the yield curve is flat. Suppose Bond C is correctly priced. Analyse Bond D to determine whether it is consistently priced in relation to Bond C. (4 marks)

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