Explain in detail the appropriate trading strategies (using derivative securities) needed in the following situations. Indicate: (1) the type(s) of securities that should be used, (2) the relevant positions in those securities, (3) where those securities are traded, (4) the transactions at each relevant point in time and (5) the payoffs that should be expected after implementing each hedging strategy. Provide formulas where necessary. For simplicity, you can ignore tailing the hedge in your answers.

a) On July 1, 2011 a financial institution wants to lock-in that day’s forward interest rate on a 6-month, $100 million loan that it plans to take on April 1, 2012. [3 marks]

b) You are convinced that the spread between Australian and US interest rates will widen over the next 6 months (for initial rUS > rAUD). How can you profit from your predictive ability? [4 marks]

c) On June 1, 2011 an oil refinery wants to lock-in the processing margin on the purchase of 120,000 barrels of crude oil that will be refined into unleaded gasoline and heating oil using a 3:2:1 crack ratio. The purchase and refining process will happen at the end of January, 2012. [4 marks]

d) A US pension fund manager wants to protect against US dollar capital losses on its Canadian common stock holdings. The manager wants to lock-in the value of the portfolio (in US dollars) for the next 3 months. [4 marks]