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ADMS 4503 (13)


4 Pages

Administrative Studies
Course Code
ADMS 4503
Nabil Tahani

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ADMS4503 3.0 Assignment #1 AP/ADMS 4503 3.0 Derivative Securities Winter 2013 Assignment #1 Instructions: (1) This assignment is to be done individually. You must sign and submit the standard cover page supplied as the last page of this assignment. Staple your assignment prior to handing it in. (2) This assignment is due on February 10, 2013. (3) The work can be typed or handwritten. If it is handwritten and too difficult to read due to messiness and poor handwriting, it will receive zero credit. (4) You must show your work to receive full credit. (5) This assignment contains 5 questions and carries a total of 30 points. Question 1 (6 marks) IBM stock sells at $194.50 and is expecte d to pay dividends of $2 in 2 and 8 months respectively. The risk-free rate is 4% per annum continuously compounded for all maturities. We consider the 1-year futures contract on IBM. (a) What is the theoretical 1-year futures price? (2 marks) (b)The 1-year futures market price is $200. Show that t here is an arbitrage and how to benefit from it? Show all details. (3 marks) (c) Based on the futures market price in part (b), what is the value of a short futures contract on IBM 10 months from now if the futures price in 10 months is $204? (1 mark) Question 2 (6 marks) The S&P 500 spot is 1,472 an d it is expected to pay a dividend yield of 2%. The risk-free rate is 4% per annum continuous ly compounded. Each contract is on $250 times the futures price. (a) What is the theoretical 1-year futures price? (2 marks) (b)The 1-year futures price is 1,490. Show that there is an arbitrage and show how to benefit from it? Show all details. (4 marks) Page 1 ADMS4503 3.0 Assignment #1 Question 3 (6 marks) The palladium sells at $701 per ounce. It has a conv enience yield denoted by y and a storage cost u = 2% (per annum continuously compounded). The risk-free interest rate is 4% per annum conti nuously compounded. The 6-month futures price is $710. A hedge fund takes 200 long positions in the 1-year futures contract on palladium today. Each contract is on 100 ounces. (a) What is the convenience yield? (2 marks) (b)Suppose that the hedge fund closes out its positions 9 months from now and makes a total gain of $100,000. What is the spot price of palladium 9 months from now if there is no arbitrage? (4 marks) Question 4 (6 marks) Suppose the spot CAD/GBP exchange rate is 1.5937 and the Canadian risk-free rate is 4% per annum. Suppose the 6-month futures exchange rate is 1.6045. (a) What is the theoretical 1-year futures exchange rate? (3 marks) (b)Suppose the 1-year futures exchange ra te is 1.62. Is there an arbitrage and if so how would you undertake it for 1 million in either currency? Show all details. (3 marks) Question 5 (6 marks) The following table gives m ont
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