Class Notes (903,845)
CA (538,103)
York (38,191)
Lecture

# Lecture5.docx

5 Pages
61 Views

Department
Course Code
Professor
Nabil Tahani

This preview shows pages 1-2. Sign up to view the full 5 pages of the document.
Arbitrage dividend PDF :
= \$50
R = 6%
(t= 6months) = \$51.30 .
Assume that the market prices are fair prices
a. T = 6 months,
= 51.30 = 
51.30 =  
51.30/ 50 = 
Ln (51.30/50) =   
Q = 6% - ln( 51.3/50)
= 0.8665%
b. T = 1 year ,  = 54
= 50  = 52.6338 < 54
herefore this is over priced
So how do we arbitrage , we :
- Short one contract
- Buy  units of asset =  = 0.9914
- Borrow ( tbuy 0.9914 units @ \$50 x 0.9914 = \$ 49.5687
Today
At T
Short one contract = 0
Upon delivery + 54
Borrow 49.5687
You return = -52.6338 =
Arbitrage currency pdf
1 year from now, you’ll need 0.8665 US to buy one cad \$
a. One year forward CAD/ EUR = 1.2355 / 0.8665 = 1.4259
= 
=  = 1.4259 4
 046
b.  = 1.44 ( over priced)
- t the contract
- Borrow 1000CAD @ 4% for 1 year
- Convert to EUR 1000/1.4046 = 711.94 EUR
- Invest EUR @ 2.5% for 1 year
Today
At T
0
CAD 1051.14 = 729.96 x 1.44
+ 711.94 EUR
-711.94 EUR
+711.94  = 729.96EUR
HEDGING
Static hedge : do something today and forget about it till maturity.
Perfect hedging means that you know exactly how the outcomes would affect you in the future.
Short hedge : you take a short position to offset a risk on a position already taken. ( short position with
short futures, long position with long futures)
Eg. Short futures position when you have a long on an asset whose price might be falling in the future.
Note: in the world of hedging, the spot market is different and separate from those of the futures where
cash settlements are made. And the spot market is for buying and delivery of commodity.
Slide 4
Assume the oil price in Aug 15
17.5
19.5
Spot sale
+17.50
Sale price : 19.5
Short
futures
- = 18.75 17.5 = 1.25
Short future = ( 18.75 19.5) = 0.75
Effective price = 17.5 + 1.25 = 18.75
or
Effective price = 19.5 0.75 = 18.75
Slide 7
= 1.2 … this is known ………………… Copper spot price on may 15 = T
-1.25
1.05
Long future
- = 1.25 1.20 = 0.05
= 1.05 1.20 = -0.15
Effective price
-1.25 + 0.05 = -1.2
-1.2

#### Loved by over 2.2 million students

Over 90% improved by at least one letter grade.

OneClass has been such a huge help in my studies at UofT especially since I am a transfer student. OneClass is the study buddy I never had before and definitely gives me the extra push to get from a B to an A!

Leah — University of Toronto

Balancing social life With academics can be difficult, that is why I'm so glad that OneClass is out there where I can find the top notes for all of my classes. Now I can be the all-star student I want to be.

Saarim — University of Michigan

As a college student living on a college budget, I love how easy it is to earn gift cards just by submitting my notes.

Jenna — University of Wisconsin

OneClass has allowed me to catch up with my most difficult course! #lifesaver

Anne — University of California
Description
Arbitrage dividend PDF : S0= \$50 R = 6% F0(t= 6months) = \$51.30 . Assume that the market prices are fair prices a. T = 6 months, F 0 51.30 = S e0 (r−q t 6%−q 1/2 51.30 = 50 e 51.30/ 50 = S e (6%−q 0.5 0 Ln (51.30/50) = 6% − q 0.5) Q = 6% - ln( 51.3/50) = 0.8665% b. T = 1 year , F mkt = 54 (6%−0.8665% ) F 0 50 e = 52.6338 < 54 Therefore this is over priced So how do we arbitrage , we : - Short one contract - Buy e−qt units of asset = e−0.8665% x 1 = 0.9914 - Borrow ( tbuy 0.9914 units @ \$50 x 0.9914 = \$ 49.5687 Today At T Short one contract = 0 Upon delivery + 54 Buy -49.5687 Borrow 49.5687 You return = -52.6338 = F 0 Your gain is \$ 1.36 Arbitrage currency pdf 1 year from now, you’ll need 0.8665 US to buy one cad \$ a. One year forward CAD/ EUR = 1.2355 / 0.8665 = 1.4259 F 0 S e0 (rCAD− rEUR)T − r CAD− rEUR)T − 4%− 2.5% 1 S 0 F e0 = 1.4259 e 4 = 1.4046 b. F mkt = 1.44 ( over priced) - short the contract - Borrow 1000CAD @ 4% for 1 year - Convert to EUR 1000/1.4046 = 711.94 EUR - Invest EUR @ 2.5% for 1 year Today At T 0 +1000 CAD 4% -1000e = -1040.81 CAD -1000 CAD CAD 1051.14 = 729.96 x 1.44 + 711.94 EUR -711.94 EUR +711.94 e 2.5% = 729.96EUR HEDGING Static hedge : do something today and forget about it till maturity. Dynamic hedging requires continuous adjustment Perfect hedging means that you know exactly how the outcomes would affect you in the future. Short hedge : you take a short position to offset a risk on a position already taken. ( short position with short futures, long position with long futures) Eg. Short futures position when you have a long on an asset whose price might be falling in the future. Note: in the world of hedging, the spot market is different and separate from those of the futures where cash settlements are made. And the spot market is for buying and delivery of commodity. Slide 4 Assume the oil price in Aug 15 17.5 19.5 Spot sale +17.50 Sale price : 19.5 Short F0- F T 18.75 – 17.5 = 1.25 Short future = ( 18.75 – 19.5) = 0.75 futures Effective price = 17.5 + 1.25 = 18.75 Effective price = 19.5 – 0.75 = 18.75 or F0 Slide 7 F = 1.2 … this is known ………………… Copper spot price on may 15 = T 0 Spot buy -1.25 1.05 Long future F T F 0 1.25 – 1.20 = 0.05 = 1.05 – 1.20 = -0.15 Effective price -1.25 + 0.05 = -1.2 -1.2 Today: 1 2(spot deal date ) maturity date of the contract ------------------------------------------------------------------------------------------------------------ F1 F2 S S 1 2 For short hedge: At Time 2 - Spotsale + S2 - Close at short futures (
More Less

Only pages 1-2 are available for preview. Some parts have been intentionally blurred.

Unlock Document

Unlock to view full version

Unlock Document
Notes
Practice
Earn
Me

OR

Don't have an account?

Join OneClass

Access over 10 million pages of study
documents for 1.3 million courses.

Join to view

OR

By registering, I agree to the Terms and Privacy Policies
Just a few more details

So we can recommend you notes for your school.