BOSTON COLLEGE

Department of Economics

EC 362

Financial Markets

Prof. Baum

Mr. Franke

Fall 1996

PROBLEM SET ONE

Due Tuesday, 1 October, at classtime

The following problems are from Dubofsky's text. Use a spreadsheet if convenient. Show your work.

1. Problem 11.1.

2. Problem 11.2.

3. Problem 11.6.

4. Problem 12.2.

5. Problem 12.3.

6. Problem 12.7.

For the following problems refer to the handout. The dates are the dates of publication in the Wall Street Journal, giving prices and transaction data from the previous trading day. All calculations can readily be done with Microsoft Excel (or any statistical package with which you are familiar).

7. Calculate the four price changes in cocoa and Colombian coffee in the spot and futures markets (December contracts) for the five days quoted. Scale the spot market data to refer to the same units as the futures contracts. For each commodity, what are the average changes in spot prices? In futures prices?

8. Calculate the volatilities (standard deviations) of these price change series. How volatile are spot price changes in each commodity relative to the futures price changes? Why might this be important for a hedger?

9. Calculate the correlations between spot and futures price changes for each commodity. Are they sizable? Why might sizable correlations be of interest to hedgers?