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QUESTION 1a) Suppose you own 10,000 shares that are worth 50 each . i) Evaluate how put options can be used to provide you with
QUESTION 1a) Suppose you own 10,000 shares that are worth 50 each
. i) Evaluate how put options can be used to provide you with insurance against a decline in the value of your holding over the next four months. ii) Construct a payoff diagram to illustrate your answer.
(b) Suppose that zero interest rates with continuous compounding are as follows:
Maturity (years) | rate per annum % |
1 | 2.0 |
2 | 3.0 |
3 | 3.7 |
4 | 4.2 |
5 | 4.5 |
Calculate forward interest rates for the second, third, fourth, and fifth years.
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