Consider a forward contract to purchase a non-dividend-paying stock in 6 months. Assume the current stock...
Consider a forward contract to purchase a non-dividend-paying stock in 6 months. Assume the current stock price is $34 and the continuously compounded risk-free interest rate is 6.5% per annum.
a. Explain the arbitrage opportunities if the forward price is $37 in the market.
b. Explain the arbitrage opportunities if the forward price is $33 in the market.
Homework Answers
Add Answer to:
Consider a forward contract to purchase a non-dividend-paying
stock in 6 months. Assume the current stock...
Consider a long forward contract to purchase a non-dividend-paying stock in 3 months. Assume the current...
Consider a long forward contract to purchase a non-dividend-paying stock in 3 months. Assume the current stock price is $40 and the risk-free interest rate is an APR of 5% compounded quarterly. If the market forward price is $43, show explicitly the arbitrage opportunity. note: this is not continuous compounding but discrete! so please do not use the Se^(rT) ( exponential formula)
Consider a six-month forward contract on a non-dividend paying stock. Assume the current stock price is...
Consider a six-month forward contract on a non-dividend paying stock. Assume the current stock price is $50 and the risk-free interest rate is 7.84% per annum with continuous compounding. Suppose the price of this six-month forward price is $53.50. Show that it creates an arbitrage opportunity? Write down the complete strategy for an arbitrageur --- you must list down all the actions that are required now and later and demonstrate how arbitrageur earns a risk-less profit.
1. A 1 year long forward contract an a non-dividend paying stock is entered into when...
1. A 1 year long forward contract an a non-dividend paying stock is entered into when the stock price is $39 and the risk-free rate of interest is 6.5% per annum with continuous compounding (a) What is the forward price? (b) Six months later; the price of the stock is $42.50 and the risk-free interest rate is still 6.5%. What is the forward price?
Suppose that you enter into a six-month forward contract on a non-dividend-paying stock when the stock...
Suppose that you enter into a six-month forward contract on a non-dividend-paying stock when the stock price is $30 and the risk-free interest rate (with quarterly compounding) is 12% per annum. a) What is equivalent continuously compounding rate? b) What is the forward price?
Consider a forward contract to purchase a coupon-bearing bond whose current price is $900. Suppose the...
Consider a forward contract to purchase a coupon-bearing bond whose current price is $900. Suppose the forward contract matures in 9 months. Assume the coupon payment of $40 is expected after 4 months. Assume that the 4-month and 9-month risk-free continuously compounded interest rate are 3% and 4% per annum, respectively. Suppose the forward price is $910. Is there an arbitrage opportunity? If so, how do you take advantage of the arbitrage opportunity?
Problem 2. Forward prices and value [25 marks] a) [5] Suppose there is a 16 months...
Problem 2. Forward prices and value [25 marks] a) [5] Suppose there is a 16 months Forward on 1 share of non- dividend paying stock traded in the market. Current stock prices are $50 and the Forward price is $57. What is the interest rate (continuously compounded) implied by the given Forward price? b) [6] Suppose that actual interest rates are 7% per annum (continuously compounded as well). Find the Fair price of Forward contract and explain your arbitrage strategy....
(b) A 6-month European call option on a non-dividend paying stock is cur- rently selling for $3. The stock price is...
(b) A 6-month European call option on a non-dividend paying stock is cur- rently selling for $3. The stock price is $50, the strike price is $55, and the risk-free interest rate is 6% per annum continuously compounded. The price for 6-months European put option with same strike, underlying and maturity is 82. What opportunities are there for an arbitrageur? Describe the strategy and compute the gain.
A one-year long forward contract on a non-dividend-paying stock is entered into when the stock price...
A one-year long forward contract on a non-dividend-paying stock is entered into when the stock price is $56 and the risk-free rate (with continuous compounding) is 8%.` (1) What are the forward price and the initial value of the forward contract? (2) Five months later, the price of the stock is $60 and the risk-free rate is still 8%. What are the forward price and the value of the forward contract?
A long forward on a non-dividend-paying stock has six months to maturity. The risk free rate...
A long forward on a non-dividend-paying stock has six months to maturity. The risk free rate is 10% annually, the current stock price is $25, and the delivery price is $24. What is the value of forward contract today?
A long forward on a non-dividend-paying stock has six months to maturity. The risk free rate...
A long forward on a non-dividend-paying stock has six months to maturity. The risk free rate is 10% annually, the current stock price is $25, and the delivery price is $24. What is the value of forward contract today?
1. A 1 year long forward contract an a non-dividend paying stock is entered into when the stock price is $39 and the risk-free rate of interest is 6.5% per annum with continuous compounding (a) What is the forward price? (b) Six months later; the price of the stock is $42.50 and the risk-free interest rate is still 6.5%. What is the forward price?
Problem 2. Forward prices and value [25 marks] a) [5] Suppose there is a 16 months Forward on 1 share of non- dividend paying stock traded in the market. Current stock prices are $50 and the Forward price is $57. What is the interest rate (continuously compounded) implied by the given Forward price? b) [6] Suppose that actual interest rates are 7% per annum (continuously compounded as well). Find the Fair price of Forward contract and explain your arbitrage strategy....
(b) A 6-month European call option on a non-dividend paying stock is cur- rently selling for $3. The stock price is $50, the strike price is $55, and the risk-free interest rate is 6% per annum continuously compounded. The price for 6-months European put option with same strike, underlying and maturity is 82. What opportunities are there for an arbitrageur? Describe the strategy and compute the gain.
A long forward on a non-dividend-paying stock has six months to maturity. The risk free rate is 10% annually, the current stock price is $25, and the delivery price is $24. What is the value of forward contract today?
A long forward on a non-dividend-paying stock has six months to maturity. The risk free rate is 10% annually, the current stock price is $25, and the delivery price is $24. What is the value of forward contract today?
Most questions answered within 3 hours.
-
With a lens, both the height and width of the image exhibit
magnification. With a mirror,...
asked 7 minutes ago -
What will be the equilibrium temperature when a 247 g block of
copper at 256 ∘C...
asked 7 minutes ago -
Question: A student reacts 1ml of acetic acid with 5ml (3.91
grams) of 1-Pentanol. Calculate the...
asked 12 minutes ago -
If the Marifield Steel Fabrication Company earned $
491,000in net income and paid a cash dividend...
asked 10 minutes ago -
Please provide products and a balanced equation for the
following reactants:
C7H16O + ZnCl2 + HCl...
asked 19 minutes ago -
In C++ Prompts the user to enter 5 numbers. Once the user has
entered the 5...
asked 29 minutes ago -
Ten narrow slits are equally spaced 3.50 mm apart and
illuminated with orange light of wavelength...
asked 29 minutes ago -
Let f(n) and g(n) be asymptotically positive
functions. Prove or disprove each of the following conjectures....
asked 38 minutes ago -
security_r_us contain highly sensitive information on people,
agencies etc. They plans to modernize their services by...
asked 37 minutes ago -
Consider a simple economy that has a fixed amount of land, and
where the only use...
asked 47 minutes ago -
A. How many millimoles of magnesium chloride are there in 4
liters of 0.2 M MgCl2...
asked 59 minutes ago -
Target Costing
Laser Impressions, Inc., manufactures color laser printers.
Model J20 presently sells for $450 and...
asked 1 hour ago