![QUESTION 2 [7 marks] A short forward contract with exactly 360 days to maturity on a stock is entered into when the stock pri](http://img.homeworklib.com/questions/fd3a3d00-a57a-11eb-9f48-99950ee63c74.png?x-oss-process=image/resize,w_560)
Homework Answers
a) The price of the forward:
= Spot price + carrying cost - dividend
= $9 + (360/365)*15%*$9 - $0.5
= $9.83
b) The price of forward after 180 days:
= $8 + (180/365)*12.5%*$9 - $0.3
= $7.76
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QUESTION 2 [7 marks] A short forward contract with exactly 360 days to maturity on a...
5. (a) Explain the differences between a forward contract and an option. [2] (b) An investor...
5. (a) Explain the differences between a forward contract and an option. [2] (b) An investor has taken a short position in a forward contract. If Sy is the price of the underlying stock at maturity and K is the strike, what is the payoff for the investor? Does the investor expect the underlying stock price to increase or decrease? Explain your answer. (2) (c) (i) An investor has just taken a short position in a 6-month forward contract on...
Exercise 3. A short forward contract on a dividend-paying stock was entered some time ago. It currently has 9 months to maturity. The stock price and the delivery price is s25 and $24 respectively. T...
Exercise 3. A short forward contract on a dividend-paying stock was entered some time ago. It currently has 9 months to maturity. The stock price and the delivery price is s25 and $24 respectively. The risk-free interest rate with continuous compounding is 8% per annum. The underlying stock is expected to pay a dividend of $2 per share in 2 months and an another dividend of $2 in 6 months. (a) What is the (initial) value of this forward contract?...
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?
Question 1 - (25 points) (a) Consider a 2-year forward contract to buy a coupon-bearing bond...
Question 1 - (25 points) (a) Consider a 2-year forward contract to buy a coupon-bearing bond that will mature 2 year from today. The current price of the bond is $102. Sup- pose that on that bond 4 coupon payments of $6 are expected after 6 months, 12 months, 18 months and 24-months. We assume that the 6-month, 12- month, 18-month and 24-month risk-free interest rates (continuously com- pounded) are, respectively, 1%, 1.3%, 1.6% and 1.9% per annum. Determine the...
A short forward contract that was negotiated some time ago will expire in six months and...
A short forward contract that was negotiated some time ago will expire in six months and has a delivery price of $150 (agreed upon price at inception). Today’s forward price for a six-month forward contract on the same underlying is $173. The six month risk-free interest rate (with continuous compounding) is 5% per year. What is today’s value of the short forward contract?
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?
3. A stock is expected to pay a dividend of $1.25 per share in 3 months...
3. A stock is expected to pay a dividend of $1.25 per share in 3 months and also in 6 months. The stock price is $46 and the risk-free rate of interest is 6.5 % per annum with continuous compounding on all maturities. An investor has taken a short position in a six-month forward contract on the stock. What is the forward price?
On June 15, you took a long forward contract (delivery on December 15) on a dividend-paying...
On June 15, you took a long forward contract (delivery on December 15) on a dividend-paying stock when the stock price was $30 and the risk-free interest rate (with discrete compounding) is 12% per annum. The amount of the dividends were known as $0.75 on Aug 15, and Nov 15. It is now September 15 and the current stock price and the risk-free interest rate are, respectively, $31 and 10%. What is the value of your long forward position now?...
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....
A one-year long forward contract on a gas portfolio is entered into when the gas portfolio...
A one-year long forward contract on a gas portfolio is entered into when the gas portfolio price is $3 and the risk-free rate of interest is 3% per annum with continuous compounding. What are the forward price and the initial value of the forward contract? Six months later, the price of the gas portfolio is $2.6 and the risk-free interest rate is still 3%. What are the forward price and the value of the forward contract?
5. (a) Explain the differences between a forward contract and an option. [2] (b) An investor has taken a short position in a forward contract. If Sy is the price of the underlying stock at maturity and K is the strike, what is the payoff for the investor? Does the investor expect the underlying stock price to increase or decrease? Explain your answer. (2) (c) (i) An investor has just taken a short position in a 6-month forward contract on...
Exercise 3. A short forward contract on a dividend-paying stock was entered some time ago. It currently has 9 months to maturity. The stock price and the delivery price is s25 and $24 respectively. The risk-free interest rate with continuous compounding is 8% per annum. The underlying stock is expected to pay a dividend of $2 per share in 2 months and an another dividend of $2 in 6 months. (a) What is the (initial) value of this forward contract?...
Question 1 - (25 points) (a) Consider a 2-year forward contract to buy a coupon-bearing bond that will mature 2 year from today. The current price of the bond is $102. Sup- pose that on that bond 4 coupon payments of $6 are expected after 6 months, 12 months, 18 months and 24-months. We assume that the 6-month, 12- month, 18-month and 24-month risk-free interest rates (continuously com- pounded) are, respectively, 1%, 1.3%, 1.6% and 1.9% per annum. Determine the...
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?
3. A stock is expected to pay a dividend of $1.25 per share in 3 months and also in 6 months. The stock price is $46 and the risk-free rate of interest is 6.5 % per annum with continuous compounding on all maturities. An investor has taken a short position in a six-month forward contract on the stock. 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....
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