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Assume you are a trader with Deutsche Bank. From the quote screen on your computer terminal, you notice that Dresdner Bank is quoting 0.7627/$1.00
Assume you are a trader with Deutsche Bank. From the quote screen on your computer terminal, you notice that Dresdner Bank is quoting 0.7627/$1.00 and Credit Suisse is offering SF1.1806/$1.00. You learn that UBS is making a direct market between the Swiss franc and the euro, with a current /SF quote of .6395. (Ignore bid-ask spreads for this problem.) (a) Based on Dresdner Bank and Credit Suisse bank's quotes, what is the no-arbitrage (equilibrium) cross rate between Swiss Franc and Euro? (5 points) (b) Is Swiss Franc overvalued or undervalued with UBS' direct quote between Swiss Franc and Euro? (2 points) (c) Show how you can execute different transactions to make a triangular arbitrage profit by trading at these prices (Please state your transactions clearly: buy which currency and sell which currency at which price). Assume you have $5,000,000 with which to conduct the arbitrage. (8 points) Due Wednesday 11/25/2020 Finance 421 (Towner) Homework 6 Problem 3: Two-stage Binomial Options Pricing (5 points) A stock with current share price of $20 can either go up or down by $2 in each of the next two months, with up occurring 55% of the time and down occurring 45% of the time. To keep things simple, we will assume that the risk-free rate is 0%, and that you can both borrow and lend at this rate. There are call and put options traded with a strike price of $22 expiring in two months. Our goal will be to find the no-arbitrage price of both the call and the put today. 55% S$24 S 55% == $22 So =$20 45% 55% Sud = $20 45% Sa and 3) Consider a simple financial market with A(0) = 90, A(T) = 100, S(0) = 5, Here, 0 < p < 1. S(T) = 20/3 with probability p. 40/9 with probability 1 p Find an arbitrage opportunity if the forward price of the stock is F = 5 dollars per share with delivery date T. To receive full credit you must write the portfolio that gives the arbitrage opportunity. You must also calculate the value of this portfolio at time t = 0 and at time t = T.
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