Suppose that initially a share price is £80 and each month thereafter either increases by 1% or decreases by 1%. Interest is compounded continuously at rate 6% per year. Calculate the no-arbitrage price of ten thousand European call options with strike price £98 and expiry date two years. State your answer to the nearest pound. Do not enter the pound sign.

Suppose that initially a share price is £80 and each month thereafter either increases by 1% or decreases by 1%. Interest is compounded continuously at rate 6% per year. Calculate the no-arbitrage price of ten thousand European call options with strike price £98 and expiry date two years. State your answer to the nearest pound. Do not enter the pound sign.

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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Suppose that initially a share price is £80 and each month thereafter either increases by 1% or decreases by 1%. Interest is compounded continuously at rate 6% per year. Calculate the no-arbitrage price of ten thousand European call options with strike price £98 and expiry date two years. State your answer to the nearest pound.
Assume that Caterpillar’s return on investments is 2.50% per annum for the next four years. Next, suppose that Caterpillar and UBS (a financial institution) enter the following four year interest rate swap: Catepillar pays X% per annum fixed to UBS and receives LIBOR from UBS. All payments are made annually. Catepillar’s net return after it enters the swap is (LIBOR + 0.75%) per annum. In this case, Catepillar transforms ___________ into __________ and X equals to ________.a. Floating Rate Investment; Fixed Rate Investment; 1.75%b. Fixed Rate Investment; Floating Rate Investment; 3.25% c. Floating Rate Liability; Fixed Rate Liability; 3.25%d. Fixed Rate Investment; Floating Rate Investment; 3.50%e. Fixed Rate Investment; Floating Rate Investment; 1.75%
Suppose that initially a share price is £80 and each month thereafter either increases by 1% or decreases by 1%. Interest is compounded continuously at rate 6% per year. Calculate the no-arbitrage price of ten thousand European call options with strike price £98 and expiry date two years.
Suppose the spot price of the British pound is currently $1.50. If the risk-free interest rate on one-year government bonds is 4% in the United States and 3% in the United Kingdom, what must the forward price of the pound be for delivery one year from now? (Do not round intermediate calculations. Round your answer to 2 decimal places.)
The stock price is currently $130. Over each of the next two 2-month periods, it is expected to go up by 3% or down by 4 %. The risk - free interest rate is 1.5% per annum with continuous compounding. What is the value of a 4-month European put option with a strike price of $120? Use a binomial tree model, and round the result to three decimal places. 1. $1.019 2. $2.602 3. $0.029 4. S0.0 5. $6.645
The stock price is currently $130. Over each of the next two 2-month periods, it is expected to go up by 3% or down by 4%. The risk - free interest rate is 1.5% per annum with continuous compounding. What is the value of a 4- month European put option with a strike price of $120? Use a binomial tree model, and round the result to three decimal places. 1. $1.019 2. $2.602 3. S 0.029 4. $0.0 5. $6.645
Assume the spot Swiss franc is $0.7000 and the six-month forward rate is $0.6950. What is the minimum price that a six-month American call option with a striking price of $0.6800 should sell for in a rational market? Assume the annualized six-month Eurodollar rate is 3.5 percent. (Do not round intermediate calculations.)
Describe the cash flows for a 5 year Plain Vanilla Interest Rate Swap. ABC pays 5% fixed, XYZ pays floating. The notional is $100 Million. If LIBOR rises by 1% one month after initiating the swap, does ABC make or lose money on this swap on a mark to market basis? Explain your reasoning.
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.
An investor buys a ($1000 FV) Treasury Strip security with 11 years to maturity at a yield of 5.1%. Two years later the yield to maturity on the strip is 4.0% and the investor decides to sell. What is the compounded annual rate of return on the investment over the investment horizon? For simplicity assume all yields in the question are quoted with annual compounding. Enter your answer as percent to two decimal places, but do not include the % sign.
An investor buys a $10,000 par, 5% coupon (semiannual payments) TIPS security with two years to maturity. If inflation every six months over the two years is 1.2 percent, what is the final payment (principal and interest) the TIPS Investor will receive? Input your final answer using two decimal places. Do not round intermediate calculations.
Suppose that a company defaults always happen halfway through a year and that payments on its credit default swap (CDS) are made once a year, at the end of each year. Suppose that the risk-free rate is 3% per annum with continuous compounding, the recovery rate is 30% and the default probability of the company in the CDS is 2% in any year conditional on no earlier default. What is the credit default swap spread in a three-year swap in basis points?