By considering one or more suitably chosen portfolios, which you should specify care- fully, and by...
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By considering one or more suitably chosen portfolios, which you should specify care- fully, and by applying the no-arbitrage principle, show that the value at time 120 of a forward contract struck at K> 0 and maturing at time T> t, on an underlying asset with spot price S,, t 0, paying dividends continuously at a rate q > 0, is f(t, S)= S, e-9 (T-1)-Ke-r(T-1) where r> 0 is the continuously-compounded constant risk-free rate of interest per annum. [4 marks] A company enters into a forward contract with a bank to sell a dividend-paying underly- ing asset for K at time T > 0. The spot price at time T turns out to be ST, > K. The company asks the bank if it can roll the contract forward until time T2, T2 > T, rather than settle at time T. The bank agrees to a new delivery price, K. Using the no-arbi- trage principle, derive an expression for K and explain how it should be calculated. By considering one or more suitably chosen portfolios, which you should specify care- fully, and by applying the no-arbitrage principle, show that the value at time 120 of a forward contract struck at K> 0 and maturing at time T> t, on an underlying asset with spot price S,, t 0, paying dividends continuously at a rate q > 0, is f(t, S)= S, e-9 (T-1)-Ke-r(T-1) where r> 0 is the continuously-compounded constant risk-free rate of interest per annum. [4 marks] A company enters into a forward contract with a bank to sell a dividend-paying underly- ing asset for K at time T > 0. The spot price at time T turns out to be ST, > K. The company asks the bank if it can roll the contract forward until time T2, T2 > T, rather than settle at time T. The bank agrees to a new delivery price, K. Using the no-arbi- trage principle, derive an expression for K and explain how it should be calculated.
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To derive the expression for K2 we use the noarbitrage principle This principle ensur... View the full answer
Related Book For
An Introduction to Derivative Securities Financial Markets and Risk Management
ISBN: 978-0393913071
1st edition
Authors: Robert A. Jarrow, Arkadev Chatterjee
Posted Date:
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