(Currency forward) The spot exchange rate USD/EUR is 0.7 EUR per one USD. What is the EUR/USD rate? Suppose the oneyear Libor rate on USD-denominated securities is 2.25%, and the one-year Libor on EUR securities is 3.50%. Using the interest rate parity, determine the forward exchange rates in EUR/USD and USD/EUR forms. Suppose we are purchasing a USD-denominated zero-coupon bond with par value of $100. What is this bond's present value? Using the above information, determine the future value of a short EUR-denominated bond. Also please calculate the present value of this EUR bond.

3.3.2-1. Revisit Case Study 3.3.2-1. Now that you have set up your model, please perform a sensitivity analysis of the obtained CDS spread. In a sensitivity analysis, we change one variable at a time and evaluate the resulting change in the spread. Please look at changing

a. Libor rate;

b. recovery rates:
i. set the same recovery rate for all time periods;
ii. change recovery rates with changing time periods;

c. default probability.
Which one of these variables has the greatest effect on the CDS spread?

4.5.1-1. Explain why delta hedging is easier for Asian options than for regular options.
4.5.2-1. Does a down-and-out call become more valuable or less valuable as we increase the frequency with which we observe the asset price in determining whether the barrier has been crossed?
What is the answer to the same question for a down-and-in call?
4.5.2-2. Explain why a regular European option is the sum of downand-out European call and down-and-in European call. Is the same true for American call options?
4.5.5-1. Consider a chooser option where the holder has the right to choose between a European call and a European put at any time during a two-year period. The maturity dates and strike prices for the calls and puts are the same regardless of when the choice is made. Is it ever optimal to make the choice before the end of the two-year period? Explain your answer.
4.5.6-1. How can the value of a forward start put option on a nondividend paying stock be calculated if it is agreed that the strike price will be 10% greater than the stock price at the time the option starts?
4.5.6-2. Explain the difference between a forward start option and a chooser option.