Question

5. If we denote the obliga Contract on the obligated delivery price after interception as K, then the wa on an asset with no cash flows is written as Ke-T-S wherer represents continuously co represents continuously compounded risk-free rate and T represents time e and represents time to maturity of the forward contract. Then what are the app contract. Then what are the appropriate equations for the below cases! 1) With cash flows (let / represent value of the cash flows over Tyears) 2) With a continuous dividend yield of b. The general relationship between the simple annual rate R with payments m time per year and the effective rate, is (1 + R.) = (1+) 1) From the above equation, derive the equation that solve for the simple rate given the effective annual rate, RA - (Note: Show all steps) 2) Using the equation from point 1), find each periodic interest rate as below. (1) When RA = 10%, what is a periodic interest rate per quarter? (2) When RA =10.52% what is a periodic interest rate per annum and Why?

Answer 1

1.
=Ke^(-rt)-I-S0

2.
=Ke^(-(r-q)t)-S0

3.
R=((1+RA)^(1/m)-1)*m

4.
=((1+10%)^(1/4)-1)
=2.41%

5.
=10.52%
because compounding frequency is annual which is the same for effective annual rate