Fundamentals of Financial Engineering
It is April 1st, 2021 and you observe that the settlement price for four-year futures contracts written on a stock that trades for $50 in the spot market is $60. If the stock is expected to pay constant annual dividends at the end of each December for the next four years and the risk-free rate is quoted as 10% in continuously
compounded annual terms over all maturity horizons, what is the expected size of the firm’s dividends?
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Consider the following market. There are two contracts A and B available. Contract A is priced...
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Financial Derivatives
A stock is expected to pay a dividend of €1.5 per share in 2 and 5 months. The stock pricecurrently stands at €100. The continuously compounded risk-free rate is 4% per annum.1) What should be the futures price for a 7-month contract?2) Suppose the futures price quotes €101. Does this create arbitrage opportunities? If thereare, how can we exploit them?3) Same question if the futures price quotes €98.
15.6. [Introductory Derivatives Sample Question 30] Determine which of the following is NOT a distinguishing characteristic...
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Consider a European put option on the stock of XYZ, with a strike price of $30...
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5. Consider a European call option on the stock of XYZ, with a strike price of...
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A German investor holds a portfolio of British stocks. The market value of the portfolio is £20 million, with a ß of 1.5 relative to the FTSE index. In November, the spot value of the FTSE index is 4,000. The dividend yield, euro interest rates, and pound interest rates are all equal to 4% (flat yield curves). The German investor fears a drop in the British stock market (but not in the British pound). The size of FTSE stock index...
4. Forward and Futures Prices A. (6 points) Suppose the stock price is $35 and the...
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The spot price per share is $115 and the risk free rate is 5% per annum...
The spot price per share is $115 and the risk free rate is 5% per annum on a continuously compounded basis. The annual volatility is 20% and the stock does not pay any dividend. All options have a one-year maturity. In answering the questions below use a binomial tree with three steps. Each step should be one-third of a year. 1)Using the binomial tree, compute the price at time 0 of a one-year European put option on 100 shares of...
15.6. [Introductory Derivatives Sample Question 30] Determine which of the following is NOT a distinguishing characteristic of futures contracts, relative to forward contracts. (A) Contracts are settled daily, and marked-to-market. (B) Contracts are more liquid, as one can offset an obligation by taking the opposite position. © Contracts are more customized to suit the buyer's needs. (D) Contracts are structured to minimize the effects of credit risk. (E) Contracts have price limits, beyond which trading may be temporarily halted. 15.7....
Consider a European put option on the stock of XYZ, with a strike price of $30 and two months to expiration. The stock pays continuous dividends at the annual continuously com- pounded yield rate of 5%. The annual continuously compounded risk free interst rate is 11%. The stock currently trades for $23 per share. Suppose that in two months, the stock will trade for either $18 per share or $29 per share. Use the one-period binomial option pricing to find...
5. Consider a European call option on the stock of XYZ, with a strike price of $25 and two months to expiration. The stock pays continuous dividends at the annual yield rate of 5%. The annual continuously compounded risk free interst rate is 11%. The stock currently trades for $23 per share. Suppose that in two months, the stock will trade for either S18 per share or $29 per share. Use the one-period binomial option pricing model to find today's...
A German investor holds a portfolio of British stocks. The market value of the portfolio is £20 million, with a ß of 1.5 relative to the FTSE index. In November, the spot value of the FTSE index is 4,000. The dividend yield, euro interest rates, and pound interest rates are all equal to 4% (flat yield curves). The German investor fears a drop in the British stock market (but not in the British pound). The size of FTSE stock index...
4. Forward and Futures Prices A. (6 points) Suppose the stock price is $35 and the continuously compounded interest rate is 5%. What is the 6-month forward price, assuming dividends are zero? B. (6 points) If the forward price is $35.50, what is the annualized continuous dividend yield? 5. Forward and Futures Prices Suppose you are a market-maker in S&R index forward contracts. The S&R index spot price is 1100, the risk-free rate is 5%, and the dividend yield on...
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