Question

The spot price of an investment asset is $30 and the risk-free rate for all maturities is 10% with continuous compounding. The asset provides an income of $3 at the end of the first year and at the end of the second year. What is the three-year forward price? (Hint: First find the PV of year 1 and year 2 incomes and then subtract it from the spot price.)

19.67 |
||

$33.46 |
||

$45.15 |
||

$40.50 |

Answer #1

Present value of inflow | ||||

First Year Cash flow | ||||

PV= FV e^rt | ||||

Where, | ||||

FV= Future value | ||||

PV = Present Value | ||||

t = length of time | ||||

r= nominal annual interest rate | ||||

=3 / 2.7183^(0.1*1) | ||||

=2.7145 | ||||

Second year's cash flow | ||||

=3 / 2.7183^(0.1*2) | ||||

=2.4561 | ||||

Net Investment = $30-2.7145-2.4561 | ||||

=24.8294 | ||||

3 year forward price | ||||

P(t)= P0 e^rt | ||||

Where, | ||||

P(t) = value at time | ||||

P0= present value | ||||

t = length of time | ||||

r= nominal annual interest rate | ||||

=24.8294 * 2.7183^(0.1*3) | ||||

=$33.46 |

The spot price of an investment asset is $50 and the risk-free
rate for all maturities is 8% with continuous compounding. The
asset provides an income of $2 at the end of the first year and at
the end of the second year. What is the three-year forward
price?
A)
$56.32
B)
$59.03
C)
$53.55
D) $57.31

The spot price of an investment asset is $50 and the risk-free
rate for all maturities is 8% with continuous compounding. The
asset provides an income of $2 at the end of the first year and at
the end of the second year. What is the three-year forward
price?
A)
$56.32
B)
$59.03
C)
$53.55
D) $57.31

Price a 1 year forward, with continuous compounding risk free
rate of 5%, spot price of $1 and a dividend of $0.10 after 6
months. The price is _______.
0.93
1.75
0.95
1.05

Question 2 [Forward and Spot
Prices: 30%]
Assume that the underlying asset/stock
is an investment asset. The information of the forward price and
stock price is provided below:
Forward price
F0
$450
Stock/Spot Price
S0
$430
Maturity date of Forward Contract (1
year)
T
1
Risk-free Rate
r
4%
Question 2 - Part A
[10%]
Given the above information, show that
there is an Arbitrage Opportunity between
the Forward price and the Spot price.
Question 2...

#1. The spot price of a certain asset is S0 = $50400 And the
price for a six months maturity future over such underlying asset
is F= $53550
a) Compute the risk free rate (continuous compounding).
b) Combine the spot and the future markets so as to replicate
debt. Your wealth is $ 50,400,000, show two strategies that: b1)
Invest purchasing both, the underlying asset and bonds. b2) Invest
purchasing only the underlying asset and borrowing money.

The
spot exchange rate is $1.16 per euro, and the six-month risk-free
interest rates are 2% in the U.S. and 1% in the eurozone, both with
continuous compounding. What is the six-month forward rate?

On May 20, 2020 , an investor entered into a three-month long
forward contract on an investment commodity X. The price of the
commodity on May 20, 2020 is $40. This commodity provides income at
a rate of 1.3% with continuous compounding and requires storage
costs at a rate of 0.8% with continuous compounding. The risk-free
rate of interest is 6% per year with semiannual compounding.
What is the equivalent risk-free rate with continuous
compounding?
What is the cost of...

The S&R index spot price is 1100, the continuously
compounded risk-free rate is 5%, and the continuous dividend yield
on the index is 2%.
(a) Suppose you observe a 6-month forward price of 1120. What
arbitrage would you undertake?
(b) Suppose you observe a 6-month forward price of 1110. What
arbitrage would you undertake?
*YOU MUST ANSWER WITH DETAILED WORKING!!

The spot price for crude oil is $30 per barrel. The storage cost
is 2.5% per annum. The risk-free interest rate is 7.5% with
continuous compounding. The futures price for a one-year contract
on crude oil should be __________.
A)
$31.59
B)
$32.08
C) $33.16
D) $34.51

The current price of a dividend-paying stock is $40. The
risk-free rate of interest is 2.0% per annum with continuous
compounding. The stock is supposed to pay dividends in six months
from now. (a) If the dividend amount is known to be $2, then the
one-year forward price should be $__________ if there is no
arbitrage opportunities. (b) If the dividend amount is known to be
4% of the stock price in six months, then the one-year forward
price should...

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