) Assume that the risk-free rate is 7% per annum (continuous compounding) for all maturities. Compute the three-month forward prices of the following assets: i) A share that will distribute a $8 dividend in 2 months and a $12 dividend in six months. The current spot price of the share is $85. ii) The Swiss franc. The current spot price is 1.4 dollars for 1 Swiss franc and the foreign (i.e., the Swiss) risk-free rate is 6% per annum (continuous compounding).

) Assume that the risk-free rate is 7% per annum (continuous compounding) for all maturities. Compute the three-month forward prices of the following assets: i) A share that will distribute a $8 dividend in 2 months and a $12 dividend in six months. The current spot price of the share is $85. ii) The Swiss franc. The current spot price is 1.4 dollars for 1 Swiss franc and the foreign (i.e., the Swiss) risk-free rate is 6% per annum (continuous compounding).

EBK CONTEMPORARY FINANCIAL MANAGEMENT

14th Edition

ISBN:9781337514835

Author:MOYER

Publisher:MOYER

Chapter22: International Financial Management

Section: Chapter Questions

Problem 2P

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A European call that will expire in one year is currently trading for $3. Assume the risk-free rate (based on continuous compounding) is 5%, the underlying stock price is $60 and the strike price is $55. a. Is there an arbitrage opportunity? b. Describe exactly what a trader should do to take advantage of the arbitrage opportunity assuming it exists. c. Determine the present value of the profit that the trader can earn assuming you identify an arbitrage opportunity. Use at least four decimal places for those questions that require a numerical answer.
Suppose that the price of a stock today is at $25. For a strike price of K = $24 a 3-month European call option on that stock is quoted with a price of $2, and a 3-month European put option on the same stock is quoted at $1.5 Assume that the risk-free rate is 10% 3. per annum. (a) Does the put-call parity hold?
Suppose that a stock is currently trading at £ 40, and that the current prices for European call and put options on this stock with maturity T = 10 years and identical strike price K are equal to £30 and £35, respectively. Assuming that interest is compounded annually at rate 4%, determine the strike price to the nearest pence.
Suppose you have a 2.5-year remaining on an interest rate swap with a notionalprincipal of $10, 000, 000 between Company A and Company B. Company A pays fixed rateand Company B pays the float rate. Fixed and float payments are exchanged every year andthe last payment was exchanged 6 months ago. The fixed rate is 3.5% per annum, and thefloating rate is tied to the annual LIBOR. The previous 1-year LIBOR rate, set 6 months ago,is 2.75%, 6 month LIBOR is 3.25%. the 1.5-year LIBOR is 3.25%, and the 2.5-year LIBOR is3.50%.Calculate the present value of the fixed and floating legs of the swap, and determine the swap’snet present value from Company A’s perspective. Assume annual compounding for discounting.
A forward contract with 8 months to maturity is written on an underlying share. The market price of the share is $34, and it is expected to pay dividends of $1.40 after 2 months and $2 immediately prior to maturity of the forward. The relevant riskless rate of interest is 4%. Calculate the theoretical forward price and initial value of the forward contract and explain the forward pricing relationship.
The stock price 6 months from the expiration of an option is $42, the exercise price of the option is $40, the risk-free rate is 10% per annum, and the volatility is 20% per annum. a) What is the price on a European call? b) What is the price of a European put? c) Check the put-call parity is satisfied.
A two-year at-the-money European put option on a stock is priced using the Black- Scholes formula. The stock pays dividend at the rate of 5% per annum and its expected rate of appreciation is 18% per annum. The volatility of the stock is 25% per annum. Given that the stock's Sharpe ratio is 0.56, calculate: (i) The elasticity of the put option. (ii) The put option's volatility.
Suppose a stock is currently (time t = 0) worth 100. Further, suppose the one year annually compounded interest rate is 2%, and the two year annually compounded rate is 3%. Find the following:a) The forward price for a forward contract on the stock with maturity year T1 = 1. b) The forward price for a forward contract on the stock with maturity year T2 = 2.c) The forward price for a forward contract with maturity T1 = 1 on a ZCB with maturity T2 = 2.d) The forward price for a forward contract with maturity T1 = 1 on a forward contract on the stock with maturity T2 = 2 and delivery price K = 101.
suppose that you enter into a six-month forward contract on a non-dividend paying stock when the stock price is $30 and the risk-free interest rate(with continuous compounding) is 12% per annum. what is the forward price? a) $30.89 b) $31.86 c) $34.56 d) $32.15
A one-year long forward contract on a dividend-paying stock is entered into, when the stock price is $40 and the risk-free rate of interest is 10% per annum with continuous compounding. The dividend yield on the index is 2% per annum with continuous compounding. What are the forward price and the initial value of the forward contract?
Suppose that the return on a U.K. treasury bill is eight percent annum and the return on a U.S. treasury bill is eight percent annum and that you had $1,000,000 earmarked for short term investment for a period of a month. In which of the securities would you place your money? (Assume you are not a speculator). Show your calculations. 1 British pound (spot) $1.7748 1 British pound (30-day futures) $1.7776
A 6-month European call option on a dividend-paying stock is cur- rently selling for $1.75. The stock price is $58.56, the strike price is $55, and a dividend of $1.20 is expected in 2 months and 5 months. The risk-free interest rate is 3% per annum for all maturities. (a) What opportunities are there for an arbitrageur? Detail your answer. (b) In this market a European put option with same strike price and maturity is also available for trading. Derive the no-arbitrage $3. price of the put option if the call option has a price of c = %3D (c) The European put option in the above section is trading at $3. What opportunities are there for an arbitrageur? Detail your answer.