Consider a 9-month forward contract established at a rate of $28. The contract is 3 months...
Consider a 9-month forward contract established at a rate of $28. The contract is 3 months into its life. The spot price is $30, the annual risk-free rate is 4%, and the underlying makes no cash payments. At month 3, determine:
a) the amount at risk of a credit loss:
b) Which party bears the credit, long or short?
Homework Answers
Answer a) amount at risk of a credit loss = (30-28)/1.041/2 = 1.9612
Answer b) since the spot price is higher than the established rate, the long will bears the credit risk
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Consider a 9-month forward contract established at a rate of
$28. The contract is 3 months...
Consider an asset with a price of R190. A new forward contract on the asset expires...
Consider an asset with a price of R190. A new forward contract on the asset expires in six months with a risk-free rate of 5.4% (discreet compounding). Three months after you entered into the contract, the price increased to R205 while the riskfree interest rate remained the same. Calculate the credit risk if you have a long position and indicate whether you or the counter party bears this risk.
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?...
A short forward contract that was negotiated some time ago will expire in six months and...
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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...
5. A short forward contract that was negotiated some time ago will expire in three months...
5. A short forward contract that was negotiated some time ago will expire in three months and has a delivery price (K) of $42. The current forward price (Fo) for three-month forward contract is $40. If Kis larger than Fo, there is a gain for the short forward contract. The three month risk-free interest rate (with continuous compounding) is 8%. What is the value of the short forward contract? A. $40.50 B. $400.00 C. $7.78 D. $1.96 E. $35.84
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)
Several months ago, XYZ entered into a long forward contract on an asset with no income....
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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...
Consider the following forward contracts: Contract A: Long AUD against USD, notional amount AUD 10,000, forward...
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(1 point) Consider a forward contract on a commodity with a current price of $750 and...
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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?...
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5. A short forward contract that was negotiated some time ago will expire in three months and has a delivery price (K) of $42. The current forward price (Fo) for three-month forward contract is $40. If Kis larger than Fo, there is a gain for the short forward contract. The three month risk-free interest rate (with continuous compounding) is 8%. What is the value of the short forward contract? A. $40.50 B. $400.00 C. $7.78 D. $1.96 E. $35.84
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 point) Consider a forward contract on a commodity with a current price of $750 and delivery time in 6 months. Assume that the risk-free rate of interest is 3.5% compounded monthly. The carrying cost is $7 per month paid at the beginning of each month. Assume that today is the beginning of a month, and the carrying cost payment has not been made yet. a) Find the forward price of the commodity for delivery in 6 months: b) Find...
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