Show the workings...
E. Suppose that you sold forward (360 days) GBP I'm at the forward rate CAD/GBP 1.82, to hedge a payment from a customer. Eleven months later the GBP trades at CAD/GBP 2.1, and (annualized) interest rates for 30 days are 12 percent for the CAD, 18 percent for the GBP. Unexpectedly, the customer pays one month early. Consider the following alternatives. You may: (a) Invest the GBP Im for one month, and deliver them to the bank you signed the forward contract with. (b) Sell the GBP Im spot, and negotiate an early termination of the outstanding forward sale. (d) Sell the GBP Im spot, and buy them forward 30 days so that you can deliver the required amount to your bank. Analyze each alternative. If the cash flows differ, trace the basis of the difference.25. You are asked to price some options on KYC stock. KYC's stock price can go up by 15 percent every year, or down by 10 percent. Both out- comes are equally likely. The risk free rate is 5 percent, and the current stock price of KYC is 100. (a) Price a European Put option on KYC with maturity of 2 years and a strike price of 100. (b) Price an American Put option on KYC with the same character- istics. Is the price different? Why or why not? 26. IBM is currently trading at $90.29 per share. You believe that IBM will have an expected return of 7% with volatility of 26.1% per year, while annual interest rates are at 0.95%. What is the price of an European put on IBM with a strike price of $90 and maturity of 1 year? 27. Shares of Ontel will sell for either $150 or $80 three months later, with probabilities 0.60 and 0.40, respectively. A European call with an exercise price of $100 sells for $25 today, and an identical put sells for $8. Both options mature in three months. What is a price of a three-month zero-coupon bond with a face of $100? 28. 401.com's stock is trading at $100 per share. The stock price will either go up or go down by 25% in each of the next two years. The annual interest rate is 5%. (a) Determine the price of a two-year European call option with the strike price X = $110. (b) Determine the price of a two-year European put option with the strike price X = $110. (c) Verify that the put-call parity holds. (d) Determine the price of a two-year American put option with the strike price X = $110. (e) What is the replicating portfolio (at every node of the tree) for the American put option with the strike price X = $110? 29. For this problem assume that the risk-free rate of interest for one year loans is 5%. Google stock is selling today for $500 a share. Assume that in one year Google will either be worth $600 a share or $475 a 16 201, Andrew W, La and Jiang Wang 1.5 Options 1 QUESTIONS share and that Google will pay no dividends for at least two years. A call option with an exercise price of $550 and one year to go until expiration is available for Google stock. What is the value of this call option? 30. A particular stock follows the price movement below. $31 $29 $24 $25 $26 523 $21 today 1-month 2-months Figure 2: Stock Price Movement (a) For this part, suppose the interest rate is fixed at 1% per month. What is the price of a put option with maturity two months, and strike of $26 ? (b) Again, suppose the interest rate is fixed at 1% per month. What10. Venizio had a government surplus of 15 billion in the year 1988. In addition, private after-tax savings exceeded private investment spending by 10 billion. What was the current account balance of Venizio in 1988? A9. CA = Sap" + Sav" = usDIObillion + uso15billion = usD25billion.Q2. Given the following data, compute the value today of an outstanding forward purchase contract initiated at fo for 1,000,000 units of foreign currency (where the exchange rate is HC/FC). Does the new value represent a gain or loss to the holder of the old contract? (Hint: First compute the new forward rate.) Spot rate S, Old forward rate, FIT (a) BEFDEM 20.5 22.0 3.5% 2.5% (b) JPY/NLG 57.5 54.2 1.25% 3.0% ITL/FRF 283.0 289.4 4.5% 3.5% CHF/GBP 2.2 1.8 2.0% 3.0%(d) When you are ready to sell the corn in September 2015, you offset your futures position at the price of $4.75. The actual basis in September is -$0.19/bu. Calculate your actual total net revenues in the local market, total equity in the futures market, and your overall profit
