For the following problems assume the effective 6-month interest rate is 2%, the S&R 6-month forward price is $1020, and use these premiums for S&R options with 6 months to expiration: Strike Call $950 $120.405 $51.777 1000 93.809 1020 84.470 1050 1107 71.802 51.873 willy. Put 74.201 84.470 101.214 137.167 Q4 (Exercise 3.14) Suppose you buy a 950-strike S&R call, sell a 1000-strike S&R call, sell a 950-strike S&R put, and buy a 1000-strike S&R put. (a) Verify that there is no S&R price risk in this transaction. (b) What is the initial cost of the position? (c) What is the value of the position after 6 months? (d) Verify that the implicit interest rate in these cash flows is 2% over 6 months.
For the following problems assume the effective 6-month interest rate is 2%, the S&R 6-month forward price is $1020, and use these premiums for S&R options with 6 months to expiration: Strike Call $950 $120.405 $51.777 1000 93.809 1020 84.470 1050 1107 71.802 51.873 willy. Put 74.201 84.470 101.214 137.167 Q4 (Exercise 3.14) Suppose you buy a 950-strike S&R call, sell a 1000-strike S&R call, sell a 950-strike S&R put, and buy a 1000-strike S&R put. (a) Verify that there is no S&R price risk in this transaction. (b) What is the initial cost of the position? (c) What is the value of the position after 6 months? (d) Verify that the implicit interest rate in these cash flows is 2% over 6 months.
Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
Problem 1PS
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Transcribed Image Text:For the following problems assume the effective 6-month interest rate is 2%, the S&R 6-month forward price is $1020, and use these premiums for S&R options with 6 months to expiration:
Strike Call
$950 $120.405 $51.777
1000 93.809
1020 84.470
1050 71.802
1107 51.873
Tuercice
Put
verly
74.201
84.470
101.214
137.167
T---
Q4 (Exercise 3.14) Suppose you buy a 950-strike S&R call, sell a 1000-strike S&R call, sell a 950-strike S&R put, and buy a 1000-strike S&R put.
(a) Verify that there is no S&R price risk in this transaction.
(b) What is the initial cost of the position?
(c) What is the value of the position after 6 months?
(d) Verify that the implicit interest rate in these cash flows is 2% over 6 months.
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Step 1: Introduction to Call option and Put option:
VIEWStep 2: a. Verify that there is no S&R price risk in this transaction as follows:
VIEWStep 3: b. The initial cost of the position is as follows:
VIEWStep 4: c. The value of the position after 6 months is as follows:
VIEWStep 5: d. Verify that the implicit interest rate in these cash flows is 2% over 6 months as follows:
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