Answered step by step
Verified Expert Solution
Question
1 Approved Answer
a) Assume that the spot price of Stock A, at time 0, is 100, and the stock does not pay any dividend. The 2 year
a) Assume that the spot price of Stock A, at time 0, is 100, and the stock does not pay any dividend. The 2 year zero-coupon, risk-free interest rate is 2.5%. The expected return of Stock A is 12%. What is the 2 year forward price of stock A? [3 Points] b) At time 0, you bought forward Stock A with maturity 2 years. After one year (at time 1) the mark to market of your position is 5.18. If the spot price of Stock A at time 1 is 106, what is the one-year zero-coupon, risk-free, interest rate at time 1? [8 Points] c) Assume that at time 0 the price of a Call option on Stock A, with maturity 2 years and exercise price 100, is equal to 3. The price of a put option on Stock A with the same maturity and the same exercise price is 2.5. Is there an arbitrage opportunity? If yes, outline the arbitrage strategy. What is the value of this strategy at time 0? [6 Points] a) Assume that the spot price of Stock A, at time 0, is 100, and the stock does not pay any dividend. The 2 year zero-coupon, risk-free interest rate is 2.5%. The expected return of Stock A is 12%. What is the 2 year forward price of stock A? [3 Points] b) At time 0, you bought forward Stock A with maturity 2 years. After one year (at time 1) the mark to market of your position is 5.18. If the spot price of Stock A at time 1 is 106, what is the one-year zero-coupon, risk-free, interest rate at time 1? [8 Points] c) Assume that at time 0 the price of a Call option on Stock A, with maturity 2 years and exercise price 100, is equal to 3. The price of a put option on Stock A with the same maturity and the same exercise price is 2.5. Is there an arbitrage opportunity? If yes, outline the arbitrage strategy. What is the value of this strategy at time 0? [6 Points]
Step by Step Solution
There are 3 Steps involved in it
Step: 1
Get Instant Access to Expert-Tailored Solutions
See step-by-step solutions with expert insights and AI powered tools for academic success
Step: 2
Step: 3
Ace Your Homework with AI
Get the answers you need in no time with our AI-driven, step-by-step assistance
Get Started