Question
1.It is expected that in exactly one year, a 12-month pure discount bond with a face value of $10,000 will sell for $9,515.00.If 2-year spot
1.It is expected that in exactly one year, a 12-month pure discount bond with a face value of $10,000 will sell for $9,515.00.If 2-year spot (zero) rates are 4.90% p.a., based on pure expectation theory, what is the current 1-year spot rate?
2.A European option to sell PBA Ltd shares for $8.50 in exactly three months is priced at 10c.The next dividend of 50c will be paid in six months, and PBA's shares are currently trading for $8.70.
i)If interest rates are 10% p.a. compounded quarterly, what is the no-arbitrage price of an option to buy PBA's shares for $8.50 in three months?
ii)What profit would be made if a put option was purchased at current prices and shares were priced at $8.15 in exactly three months' time?
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