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PLEASE ELABORATE IN DETAIL FOR B PART. You currently hold Scot Tech stocks worth 10 million. For an operative reason, you plan to sell all
PLEASE ELABORATE IN DETAIL FOR B PART.
You currently hold Scot Tech stocks worth 10 million. For an operative reason, you plan to sell all assets of Scot Tech in exactly 1 year. You understand the volatility of Scot Tech and would like to hedge such a risk by using a forward contract to sell all your Scot Tech stocks in a year. It is realised the annual risk-free rate from Treasury bills is 3 percent. a (a) Determine and explain the appropriate price you should receive in 1 year by the forward contract. (5%) (b) The counterparty to the forward contract is willing to enter the opposite position at a forward price of 10.7 million. Explain the strategy you need to execute to take advantage of the situation. Show the strategy in detail and compute the annual rate of return of the strategy. (10%) You currently hold Scot Tech stocks worth 10 million. For an operative reason, you plan to sell all assets of Scot Tech in exactly 1 year. You understand the volatility of Scot Tech and would like to hedge such a risk by using a forward contract to sell all your Scot Tech stocks in a year. It is realised the annual risk-free rate from Treasury bills is 3 percent. a (a) Determine and explain the appropriate price you should receive in 1 year by the forward contract. (5%) (b) The counterparty to the forward contract is willing to enter the opposite position at a forward price of 10.7 million. Explain the strategy you need to execute to take advantage of the situation. Show the strategy in detail and compute the annual rate of return of the strategy. (10%)Step by Step Solution
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