(a) Consider a forward contract on an asset S with maturity T = 10 years. The asset S pays no dividends and the spot price at time 0 is S(0) = £56. The continuously compounded interest rate is r 2% per annuum. Calculate the forward price F(0, T). = (b) Consider the setting of (a). Suppose that you can enter a forward con- tract on S (long or short) with forward price of F(0, T) £70 and maturity T = 10. Assume that you are also allowed to trade any number of zero coupon bonds with maturity T 10, and any number of the underlying stock S. Construct = an arbitrage. (c) = Consider a 6-month forward contract written on 100Kg of coffee beans. Assume that the spot price is £10 per Kg and that the continuously compounded risk free rate is r 5% per annum. Suppose that storing the coffee beans incurs an unknown cost, due halfway the contract. What are the storage costs if the forward price is £1005? -

(a) Consider a forward contract on an asset S with maturity T = 10 years. The asset S pays no dividends and the spot price at time 0 is S(0) = £56. The continuously compounded interest rate is r 2% per annuum. Calculate the forward price F(0, T). = (b) Consider the setting of (a). Suppose that you can enter a forward con- tract on S (long or short) with forward price of F(0, T) £70 and maturity T = 10. Assume that you are also allowed to trade any number of zero coupon bonds with maturity T 10, and any number of the underlying stock S. Construct = an arbitrage. (c) = Consider a 6-month forward contract written on 100Kg of coffee beans. Assume that the spot price is £10 per Kg and that the continuously compounded risk free rate is r 5% per annum. Suppose that storing the coffee beans incurs an unknown cost, due halfway the contract. What are the storage costs if the forward price is £1005? -

International Financial Management

14th Edition

ISBN:9780357130698

Author:Madura

Publisher:Madura

Chapter5: Currency Derivatives

Section: Chapter Questions

Problem 32QA

See similar textbooks

Similar questions

If Po is the initial price of the security, P₁ is the price after you hold it for a year, and X represents a direct payment, an asset's rate of return is equal to: rate of return = (P₁ - Po) rate of return = (P₁ - Po) + X rate of return = (P₁-Po) / Po + XPo rate of return = (P₁ - Po)/Po + X
Suppose that, in each period, the cost of a security either goes up by a factor of 2 or goes down by a factor of 1/2 (i.e. u=2, d=1/2). If the initial price of the security is 100, determine the no-arbitrage cost of a call option to purchase the security at the end of two periods for a price of 150.
Suppose that, in each period, the cost of a security either goes up by a factor of 2 or goes down by a factor of 1/2 (i.e.,u= 2, d=1/2). If the initial price of the security is 100, determine the no-arbitrage cost of a call option to purchasse the security at the end of two periods for a price of 150. My main question is what should the no-arbitrage price of the call be? Can I have complete detail and formula please.
An off-market forward contract is a forward where either you have to pay a premium or you receive a premium for entering into the contract. (With a standard forward contract, the premium is zero.) Suppose the effective annual interest rate is 11 % and the S-R index is 1000. Consider 1-year forward contracts. a) Suppose you are offered a long forward contract at a forward price of $ 1310. How much would you need to be paid to enter into this contract $ 144.1 ? b) Suppose you are offered a long forward contract at a forward price of $ 1035. How much would you need be willing to pay to enter into this contract $ 113.85 ?
Suppose the gold price is $300/oz., the 1-year forward price is 310.686, and the continuously compounded risk-free rate is 5%. a. What is the lease rate? b. Demonstrate a cash-and-carry strategy that provides the zero cash flow at time 0 and the maturity date. (You borrow to buy gold, sell the gold forward, and lend the gold, earning the lease rate.) c. What is the return on a cash-and-carry strategy in which gold is not loaned? (You borrow to buy gold and sell the gold forward.)
2. Assume a continuously compounding dollar interest rate of 5%. If you long a 1-year forward contract on a security with a delivery price K of $55, (a) the security to the future (except interest cost). What should be the current forward price F on the security with 1-year maturity? If the current spot price is $50, there is not other costs or benefits in carrying (b) position in the 1-year forward with a delivery price of $55? Based on your calculated forward price, what is the current value of your long
Consider a forward contract that expires in 9 months. The underlying asset is worth $250 and the forward price is $285. Suppose we hold the long position in the forward contract. The risk free rate is 8 percent. The appropriate forward price should be: a. $270.00 b. $35.00 c. $285.00 d. $264.85
You are an investor in the world where short-selling assets is prohibited. Suppose that the price of asset X in period 0 is $200. This asset will pay a dividend of $8 one year from now in period 1. Let the riskless interest rate from 0 to period q be 5%.Assume the price for a future contract delivery in period 1 is $210. a) Can you make an arbitrage profit when $210 is the price? If so, state specifically what financial transaction? b) Now, assume the price for a futures contract with delivery in period 1 is K190. Can you make an arbitrage profit when this is the price? If so, state specifically what financial transaction you would make in 0 and period 1 to realize a profit. If not, explain?
Suppose that you have calibrated both HL and BDT models to the yield curve and are trying to price a forward contract on a 5 year treasury note (Note: a forward contract is an obligation to buy a 5y treasury not at a predetermined date in the future at a predetermined price). Which of the two models will assign a higher price to this forward contract? a. HL price will be higher b. HL and BDT prices will be equal c. BDT price will be higher Explain why.
Assume you have the following asset and liability in your Balance Sheet: Asset - Bond A Modified Duration = 2.6 years Value = RM1.5 million Liability - Bond B Modified Duration = 3.1 years Value = RM1.0 million a. Calculate the duration gap. b. What is the expected change in Net Worth if interest increases by 1%? c. What should or could you to achieve immunised balance sheet? Note: Please show all workings.
Imagine that the table above outlines deposits rates. Assuming A wants a fixed rate deposit and B wants a floating rate deposit, design the swap that would split the net gain in proportion 3:1 between A and B (A=3 : B=1).
12.