Answered step by step
Verified Expert Solution
Link Copied!

Question

1 Approved Answer

1. The current value of the P&S 347 index is 2300 points while the prices of a P&S futures contract for delivery in six months

1.

The current value of the P&S 347 index is 2300 points while the prices of a P&S futures contract for delivery in six months is $60,000. The risk-free interest rate is 10% per year and the future value of the dividends P&S index is $2500. The contract multiplier is %25, which means that for the purposes of this futures contract each index point is worth that much. No need to compound interest.

  • a) What is the value of the arbitrage profit per contract that can be made here?
  • b) If the cost of short-selling shares corresponding to one P&S index future is $3000, what is the value of the arbitrage profit per contract?

2.

Two European call options, A and B (with strike prices KA and KB respectively, and premia CA and CB respectively), are written on the same underlying and expire at the same time. If KA

3.

The stock of the Triangular File Company is trading at $90 per share. A one-year call option written on Triangular File, with a strike price of $100, is trading at $8. The interest rate is 10% per year.

  • a) Suppose that European put options on Triangular File are not available. How can you construct a one-year put option with a strike price of $100? Use a cash flow table to support your argument by demonstrating that the payoffs from your portfolio at any time and in any state of the world look like those from the put option you are trying to construct
  • b) Now suppose European one-year put options with strike price of $100 are traded. What is their no-arbitrage price?

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

Essentials of Investments

Authors: Zvi Bodie, Alex Kane, Alan J. Marcus

10th edition

77835425, 978-0077835422

More Books

Students also viewed these Finance questions

Question

Organize a family picnic using the steps suggested in this chapter.

Answered: 1 week ago