Answered step by step
Verified Expert Solution
Link Copied!

Question

1 Approved Answer

1) (Forward Pricing - use continuous compounding) A non-dividend paying stock is currently traded at $65 per share. What should be an equilibrium forward price

1) (Forward Pricing - use continuous compounding)

A non-dividend paying stock is currently traded at $65 per share. What should be an equilibrium forward price on the stock for delivery in 9 months? The risk-free interest rate (with continuous compounding) is 6% per annum.

2) (Forward Valuation)

In August, you took a long position on a 6-month forward contract on a non-dividend-paying stock when the stock price was $45 and the risk-free interest rate (with discrete compounding) is 4% per annum. It is now September, exacly one month later. The current stock price is $50 and the interest rate is 6%. Estimate the value of your position now. Assume the forward contracts are priced such that no arbitrage profit making opportunities exist.

3) (Arbitrage) On May 9, 2012 , Apple Inc. (AAPL) stock was traded at $568.50 ( spot price). The mean target price by analysts was $707.09. On May 9th, 2012, a forward dealer was willing to sell AAPL stocks on a forward contract maturing in 3 months (8/9/2012) at $640.25 (3-mo forward price) and buy at 632.25.You can borrow or lend money with a 3-month maturity at 4% /year.

a) The market is not in equilibrium. Explain/Prove why the market is not in equilibrium.

b) Design an arbitrage profit taking strategy and show the amount of the profit your strategy will produce.

4) (Options) On January 12, 2012, you bought a call option and a put option on Apple stock (AAPL) with a strike price of $450. The option premium you paid was $40 for the call and $5 for the put. The option expired in March 2012. On expiration date, the AAPL's spot price was $580.

a) What is the payoff from the call option?

b) What is the profit or loss from the call option

c) What is the payoff from the put option?

d) What is the profit or loss from the put option?

Step by Step Solution

There are 3 Steps involved in it

Step: 1

blur-text-image

Get Instant Access to Expert-Tailored Solutions

See step-by-step solutions with expert insights and AI powered tools for academic success

Step: 2

blur-text-image

Step: 3

blur-text-image

Ace Your Homework with AI

Get the answers you need in no time with our AI-driven, step-by-step assistance

Get Started

Recommended Textbook for

Derivatives Markets

Authors: Robert McDonald

3rd Edition

978-9332536746, 9789332536746

More Books

Students also viewed these Finance questions

Question

Describe the graphs of the equation. x 2 + y 2 3

Answered: 1 week ago