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- A European call that will expire in one year is currently trading for $3. Assume the risk-free rate (based on continuous compounding) is 5%, the underlying stock price is $60 and the strike price is $55. a. Is there an arbitrage opportunity? b. Describe exactly what a trader should do to take advantage of the arbitrage opportunity assuming it exists. c. Determine the present value of the profit that the trader can earn assuming you identify an arbitrage opportunity. Use at least four decimal places for those questions that require a numerical answer.You have the following financial market information. You also have 1.88 million Australian dollar (A$) or 3.14 million Thai baht (THB) to make a profit due to covered interest arbitrage (CIA). Calculate the profit in A$ or THB if the CIA opportunity exists in the market. (enter the whole number without sign and symbol) Bid price Ask price A$0.0464 A$0.0682 THB spot rate THB one-year forward rate A$0.0425 A$0.0634 A$ spot rate THB22.4037 THB24.2606 A$ one-year forward rate THB27.6528 THB29.6897 Deposit rate Loan rate Interest rate on A$ 2.70% 4.58% Interest rate on THB 6.98% 8.23%You are trader at Tiger Capital. Todays market (bid-ask) rates for the number of USD per EUR are as follows:Spot rate: 1.1250 - 1.1254 USD = EUR 1.0 3 month forward rate: 1.1055 - 1.1060 USD = EUR 1.0 You think (i.e., have a hunch) that the EUR will weaken against the USD over the next 3 months and decide to do a trade today to exploit your hunch. Specifically, you sell 10 million EUR in the 3 month forward market today. You leave that position for 3 months. In 3 months from today, the spot exchange rate (number of USD per EUR) turns out to be 1.1100. How much profit or loss have you made? Give your answer to the nearest USD and if it is a loss, enter your amount with a MINUS sign.
- This question will compare two different arbitrage situations. Recall that arbitrage should equalize rates of return. We want to explore what this implies about equalizing prices. In the first situation, two assets, A and B, will each make a single guaranteed payment of $100 in 1 year. But asset A has a current price of $80 while asset B has a current price of $90.a. Which asset has the higher expected rate of return at current prices? Given their rates of return, which asset should investors be buying and which asset should they be selling?b. Assume that arbitrage continues until A and B have the same expected rate of return. When arbitrage ceases, will A and B have the same price?Next, consider another pair of assets, C and D. Asset C will make a single payment of $150 in one year while D will make a single payment of $200 in one year. Assume that the current price of C is $120 and that the current price of D is $180.c. Which asset has the higher expected rate of return at current…Assume that the risk-free rate, RF, is currently 8%, the market return, RM, is 12%, and asset A has a beta, of 1.10. (could be done on word document or excel). Draw the security market line (SML) Use the CAPM to calculate the required return, on asset A. Assume that as a result of recent economic events, inflationary expectations have declined by 3%, lowering RF and RM to 5% and 9%, respectively. Draw the new SML on the axes in part a, and calculate and show the new required return for asset A. Assume that as a result of recent events, investors have become more risk averse, causing the market return to rise by 2%, to be14%. Ignoring the shift in part c, draw the new SML on the same set of axes that you used before, and calculate and show the new required return for asset A. From the previous changes, what conclusions can be drawn about the impact of (1) decreased inflationary expectations and (2) increased risk aversion on the required returns of risky assets?Assume that the risk-free rate, RF, is currently 8%, the market return, RM, is 12%, and asset A has a beta, of 1.10. (could be done on word document or excel). Draw the security market line (SML) Use the CAPM to calculate the required return, on asset A. Assume that as a result of recent economic events, inflationary expectations have declined by 3%, lowering RF and RM to 5% and 9%, respectively. Draw the new SML on the axes in part a, and calculate and show the new required return for asset A. Assume that as a result of recent events, investors have become more risk averse, causing the market return to rise by 2%, to be14%. Ignoring the shift in part c, draw the new SML on the same set of axes that you used before, and calculate and show the new required return for asset A. From the previous changes, what conclusions can be drawn about the impact of (1) decreased inflationary expectations and (2) increased risk aversion on the required returns of risky assets?…
- How to solve this problem? plz solve it step by step with formulas, thank u! (which one is the risk-free rate? 1% or 2%) Options on Indexes and Currencies Example Suppose that the current exchange rate of AUD to CAD is 1.2 AUD/CAD and o = 0.4463. Find the price of American put option to sell CAD for AUD at K = $1.1 AUD/CAD before or at half a year from now. Assume that the risk-free rates in Canada and Australia are 2% and 1%, respectively. Find the price of the American call option today by using the two period binomial model.You took a long position on EUR when the prevailing market rate was EUR/USD: 1.3223-1.3227. After six months, you want to square your net FX position to take profits. Which of the following scenarios will yield you maximum profits? Scenario A: at EUR/USD 1.3245 – 1.3253 Scenario B: at EUR/USD 1.3230 – 1.3255 Scenario C: at EUR/USD 1.3231 – 1.3235 Scenario D: at EUR/USD 1.3247 – 1.3252 You took a short position on GBP when the prevailing market rate was GBP/USD: 1.3223-1.3227. After six months, you want to square your net FX position when the prevailing market rate is GBP/USD 1.3218-1.3221. How may pips did you earn? 5 pips 9 pips 2 pips .0009 pips If you want to square your long GBP position, at what rate are you going to sell GBP to maximize profits given GBP/USD quotes from three counterparties? BDO: 1.35-45 BPI: 1.40-55 SECB: 1.50-1.65 1.35 1.50 1.65 1.45 Given “RTB 5-12”, which of the following statements is correct? This is a 5-yr RTB issued in 2012 This…The following is the spot and forward rates of dollar against Euro. Spot 30-day forward Euro/$ 0.85 0.90 You sign a contract for selling John Deere with the amount of 1 billion euros that will be delivered in 30days. You expect the 30day later the spot rates of dollar to be 0.75 with 50% chance and 0.95 with 50%. What is the expected dollar amount if no forward has been used? As a risk-neutral person, is it a good idea to use the forward?
- An asset has a current price of $10 and has volatility of 0.35. The expected price in 9 months is $13. The US continuous risk free rate (rf) is 5.5% while the Philippine continuous risk-free rate (rd) is 6.5%. The value to the short and to the long would be? The price of a European stock is €50 and it as an expected price of €65 in 8 months. The stock has a variance of 0.36. The European continuous risk free rate is 4.5% while the US continuous risk free rate is 3.2%. The value to the short and to the long would be?If the return on the risk-free asset is 2.25% (Rf = 2.25%) and the market return is 6.50% (Rm = 6.50%), what is the beta of Bank of America, BAC, if it has had a return of 9.14%? You must show all counts.2. Consider a European put with an exercise (strike) price of 5.00 and with 6 months to maturity. The underlying asset has a volatility of 30% and the riskless rate is 5% per year. Estimate a numerical upper bound for the asset price S(t) (to nearest 0.01) at which an European put will sell below its intrinsic value of max(E – S(t), 0). (Compute P(S, t) and E – S(t) for some values of S(t) below the strike price. Compute P(S, t) to at least 3 decimal places.)
