Question
Answer truth or false for the following questions a) The spot price of a six-month bond is $195.00. The bond is expected to pay a
Answer truth or false for the following questions
a) The spot price of a six-month bond is $195.00. The bond is expected to pay a coupon of $20 in 3 months and the risk free interest rate for all maturities is 10% per annum. A six-month forward price of this bond is said to be over priced if it is quoted as $184.00.
b)You plan to borrow $10 million for 3 months beginning in March. You can achieve a perfect hedge of your borrowing rate by buying FRA.
c) A stock is trading at $150. A call option on the stock with a maturity of three months is trading at $9.30 and has a delta of 0.45. If the stock price increases to $159, the new call price will be more than $13.35.
d)The spot market price of premium cotton is $50 per kg. A futures contract on 100,000 kg with settlement in 1 year is currently priced at $55.50 per kg. The one-year interest rate is 8% p.a. (continuously compounded) and it costs $0.70 per kg per year (payable at the beginning of each year) to store cotton. You can make riskless arbitrage profit of $58,000 (to the nearest dollar) by buying 100,000 per kg of cotton, storing it and selling one futures contract.
f) ladyfly shares and a pair of 3month options with strike price of $50 are trading at the prices in the table below. Assuming the 3month riskfree interest rate (with continuous compounding) is 10% p.a. There is no arbitrage opportunity in this set of prices
Share price: $ 52.00
Call premium: $4.50
Put premium: $1.26
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