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a) A three-month forward contract exists on a zero-coupon corporate bond with a current price per 100 nominal of 42.60. The yield available on three-month

a) A three-month forward contract exists on a zero-coupon corporate bond with a current price per 100 nominal of 42.60. The yield available on three-month government securities is 6% pa effective. Calculate the forward price.

b) Portfolio B contains a European put option and a share. Compare this with the alternative of cash, currently worth ke-r(T-t)- . At time T portfolio B will be worth at least as much as the cash alternative. Why must Portfolio B be worth at least as much as the cash alternative?

What is the lower bound for a 3-month European put option on Share X if the share price is 95, the exercise price 100 and the risk-free rate 12% pa?

c) Explain why the put-call parity relationship above does not hold in the case of:

  1. American options on non-dividend-paying shares.
  2. European options on dividend-paying shares.

Company X issues 3-month European call options on its own shares with a strike price of 120p. They are currently priced at 30 pence per share. The current share price is 123p and the current force of interest is = 6% pa .

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