The price of oil is $70 (spot), $75 (one-year forward), and $80 (two-year forward). Convenience yields and other costs and benefits of storing oil are zero. What is the price of a two-year annual-pay oil commodity swap? Hint: Extract continuous discount rates from the forward prices.

The price of oil is $70 (spot), $75 (one-year forward), and $80 (two-year forward). Convenience yields and other costs and benefits of storing oil are zero. What is the price of a two-year annual-pay oil commodity swap? Hint: Extract continuous discount rates from the forward prices.

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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Question

A 4 The price of oil is $70 (spot), $75 (one-year forward), and $80 (two-year forward). Convenience yields and other costs and benefits of storing oil are zero. What is the price of a two-year annual-pay oil commodity swap? Hint: Extract continuous discount rates from the forward prices.

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D3 show the solution in details Use the binomial option pricing model to find the value of a call option on £10,000 with a strike price of €12,500. The current exchange rate is €1.50/£1.00 and in the next period the exchange rate can increase to €2.40/£ or decrease to €0.9375/€1.00 (i.e. u = 1.6 and d = 1/u = 0.625). The current interest rates are i€ = 3% and are i£ = 4%. Choose the answer closest to yours. the answer is A) €3,275
8. Assume that the spot price of crude oil is $20 a barrel and the annual interest rate equals 4%. The cost of storing and insuring oil for one year is 1%. (a) What is the price of the 1- year forward contract for crude oil? (b) What should you do if the forward crude oil price is $20? (c) What if the crude oil forward price is $25?
am. 289.
PROBLEM 3. Spot price of crude oil is 83.84/bbl. The total interest rate on six-month loans and deposits is 0.84%. The storage cost is 0.33% of the asset value per month paid at the end of the storage period. Assuming no transaction cost, determine the no-arbitrage price for a crude oil futures contract maturing six months from now.
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What is the price of an asset providing $100 in state 1 and $50 in state 2?
Assume a risk-free asset in the U.S. is currently yielding 2.7 percent while a Canadian risk-free asset is yielding 2.8 percent and the current spot rate is Can$1.2849 = $1. What is the approximate 6-month forward rate if interest rate parity holds? Can$1.2855 Can$1.2838 Can$1.2843 Can$1.2862 Can$1.2836
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. Year End Cash Flow Alternative A Alternative B 0 -1,000 600 1 600 500 2 600 -2,000 3 600 400 4 600 200 5 -2,100 -1,000 6 700 1,386 a) Solve for the Net Present Value of the alternatives A and B using interest rates from 0% upward b) what are the rate of return of the two alternatives c) If your MARR is 8 percent, which alternatives would you select? Comment briefly on your results. What are some problems associated with the ROR method?
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Choose option a,b,c,d,e for the following: Question 7 - Imagine two currencies: X and Y. If it takes more units of X to buy Y 90 days forward: a. Then X will have depreciated over the 90 day period. b. Then Y would be devalued over the 90 day period. c. Then X would be devalued over the 90 day period. d. Then Y would have appreciated over the 90 day period. e. No option is correct.
5. Suppose that the exchange rate is €0.80/$. A 2-year euro-denominated European call option on dollars with a strike of €0.90 sells for €0.10. The continuously compounded risk-free interest rate on euros is 2.5% and the continuously compounded risk-free interest rate on dollars is 2%. Calculate the price of a 2-year euro-denominated European put option on dollars with a strike of C0.90.

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