Speculator is willing to create an arbitrage strategy on the derivative market. The spot price of coupon paying bond is 500 USD. The bond has a remaining life of 1.5Y, nominal value of 1,000 USD and interest of 5% p.a. under semiannual compounding. Coupons are paid each 6M (incl. the next coupon that will be paid in 6M period). The spot risk-free market rates pa. under continuous compounding for 6M, 1Y and 1.5Y maturity are 4%, 6% and 8% respectively. What should be speculator's arbitrage strategy if speculator could write / enter a 1Y forward contract with: a delivery price of 510 GBP, a.
Speculator is willing to create an arbitrage strategy on the derivative market. The spot price of coupon paying bond is 500 USD. The bond has a remaining life of 1.5Y, nominal value of 1,000 USD and interest of 5% p.a. under semiannual compounding. Coupons are paid each 6M (incl. the next coupon that will be paid in 6M period). The spot risk-free market rates pa. under continuous compounding for 6M, 1Y and 1.5Y maturity are 4%, 6% and 8% respectively. What should be speculator's arbitrage strategy if speculator could write / enter a 1Y forward contract with: a delivery price of 510 GBP, a.
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
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Transcribed Image Text:Speculator is willing to create an arbitrage strategy on the derivative market. The spot price
of coupon paying bond is 500 USD. The bond has a remaining life of 1.5Y, nominal value
of 1,000 USD and interest of 5% p.a. under semiannual compounding. Coupons are paid
each 6M (incl. the next coupon that will be paid in 6M period). The spot risk-free market
rates pa. under continuous compounding for 6M, 1Y and 1.5Y maturity are 4%, 6% and 8%
respectively. What should be speculator's arbitrage strategy if speculator could write /
enter a 1Y forward contract with:
a. a delivery price of 510 GBP,
b. a delivery price of 400 GBP.
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