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answer the 5 questions (see pdf below)
Problem 1 (20%)
Suppose that you write a
answer the 5 questions (see pdf below)
Problem 1 (20%)
Suppose that you write a put contract with a strike price of $40 and an expiration date in 3
months. The current stock price is $41 and the contract is on 100 shares. What have you committed
yourself to? How much could you gain or lose?
Problem 2 (20%)
A deposit account pays 12% per annum with continuous compounding, but interest is actually
paid quarterly. How much interest will be paid each quarter on a $10; 000 deposit?
Problem 3 (20%)
The term structure of interest rates is upward-sloping. Put the following in order of magnitude:
(a) The 5-year zero rate
(b) The yield on a 5-year coupon-bearing bond
(c) The forward rate corresponding to the period between 4.75 and 5 years in the future.
Problem 4 (20%)
A 10-year 8% coupon bond currently sells for $90. A 10-year 4% coupon bond currently sells
for $80. What is the 10-year zero rate? (Hint: Consider taking a long position in two of the 4%
coupon bonds and a short position in one of the 8% coupon bonds.)
Problem 5 (20%)
1Suppose that F1 and F2 are two futures contracts on the same commodity with times to maturity,
t1 and t2, where t2 > t1. Prove that
F2 6 F1e
r(t2 t1)
:
Where r is the interest rate (assumed constant) and there are no storage costs. For the purposes
of this problem, assume that a futures contract is the same as a forward contract
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