What is the value of a derivative that pays off $300 in 6 months if an index is less than 900 and zero otherwise? Assume that the current level of the index is 920, the risk - free rate is 8% per annum, the dividend yield on the index is 3% per annum, and the volatility of the index is 20%. 1. 95.33 2. 68.71 3. There is no correct answer. 4. 41.08 5. 114.39

What is the value of a derivative that pays off $300 in 6 months if an index is less than 900 and zero otherwise? Assume that the current level of the index is 920, the risk - free rate is 8% per annum, the dividend yield on the index is 3% per annum, and the volatility of the index is 20%. 1. 95.33 2. 68.71 3. There is no correct answer. 4. 41.08 5. 114.39

Intermediate Financial Management (MindTap Course List)

13th Edition

ISBN:9781337395083

Author:Eugene F. Brigham, Phillip R. Daves

Publisher:Eugene F. Brigham, Phillip R. Daves

Chapter16: Capital Structure Decisions

Section: Chapter Questions

Problem 10MC: Suppose there is a large probability that L will default on its debt. For the purpose of this...

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D3) The value of a derivative that pays off $100 after one year if a company has defaulted during the year is $5. The value of a derivative that pays off $100 after one year if a company has not defaulted is $97. (a) What is the risk-free rate? (b) What is the risk-neutral probability of default?
2 Question II: The S&R index spot price is 1100, the 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?
5. Suppose the one-year futures price on a stock-index portfolio is 1218, the stock index currently is 1200, the one-year risk-free interest rate is 3%, and the ybar-end dividend that will be paid on a $1,200 investment in the index portfolio is $15. a. By how much is the contract mispriced? b. Formulate a zero-net-investment arbitrage portfolio and show that you can lock in riskless profits equal to the futures mispricing. Assume a zero bid-ask spread in security and futures transactions. Now assume that if you short sell the stocks in the index portfolio, the proceeds are kept with the broker, and you do not receive any interest income of the funds. Is there still an arbitrage opportunity (assuming that you don't already own the shares in the index)? d. Given the short sale rules, what is the no-arbitrage band for the stock-futures price relationship? Specifically, how high and how low can the futures price be without giving rise to arbitrage opportunities. C.
DO not Answer Question 1-6, Only below question A-C needed. 21. Consider the following balance sheet (in millions) for an FI: Assets Liabilities Duration = 10 years $950 Duration = 2 years $860 Equity $90 What is the FI's duration gap? What is the FI's interest rate risk exposure? How can the FI use futures and forward contracts to put on a macrohedge? What is the impact on the FI's equity value if the relative change in interest rates is an increase of 1 percent? That is, DR/(1+R) = 0.01. Suppose that the FI in part (c) macrohedges using Treasury bond futures that are currently priced at 96. What is the impact on the FI's futures position if the relative change in all interest rates is an increase of 1 percent? That is, DR/(1+R) = 0.01. Assume that the deliverable Treasury bond has a duration of nine years. If the FI…
Consider the following balance sheet (in millions) for an FI: Assets Liabilities Duration = 10 years $950 Duration = 2 years $860 Equity $90 What is the FI's duration gap, and FI's interest rate risk exposure ? How can the FI use futures and forward contracts to put on a macrohedge? What is the impact on the FI's equity value if the relative change in interest rates is an increase of 1 percent? That is, DR/(1+R) = 0.01. Suppose that the FI in part (c) macrohedges using Treasury bond futures that are currently priced at 96. What is the impact on the FI's futures position if the relative change in all interest rates is an increase of 1 percent? That is, DR/(1+R) = 0.01. Assume that the deliverable Treasury bond has a duration of nine years. If the FI wants to macrohedge, how many Treasury bond futures contracts does it need?
Q2 (Exercise 5.8) 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?
Answer the following question and give the specific process: What is the value of a derivative that pays off $100 in six months if an index is greater than 1,000 and zero otherwise? Assume that the current level of the index is 960, the risk-free rate is 8% per annum, the dividend yield on the index is 3% per annum, and the volatility of the index is 20%. (Hint: Use Binary options)
31. Suppose the index in the previous example has a value of 998 after 90 days. What is the value of a long position in the index forward contract, assuming a 5.23% continuously compounded risk-free rate and a 2.167% continuously compounded dividend yield? a) –Php87.629109 b) Php87.629109 c) Php93.414429 d) –Php93.414429 32. What is the price of a 1 x 4 FRA when the current 30-day LIBOR is 5.15% and the 100-day LIBOR is 5.85%? a) 6.124% b) 1.625% c) 0.23% d) 6.052% 33. Continuing with the previous problem for a 1 x 4 FRA, assume a notional principal of Php2 million and that the 70-day rate has climbed to 6.5%, which is higher than the contract rate determined in the previous problem. What is the value of FRA at maturity? a) Php1,462.2222 b) Php1,443.97202 c) Php49,093.333 d) Php48,480.5925
Suppose there is a large probability that L will default on its debt. For the purpose of this example, assume that the value of Ls operations is 4 million (the value of its debt plus equity). Assume also that its debt consists of 1-year, zero coupon bonds with a face value of 2 million. Finally, assume that Ls volatility, , is 0.60 and that the risk-free rate rRF is 6%.
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Assume investors are indifferent among security maturities. Today, the annualized 2-year interest rate is 2.20 percent, and the 1-year interest rate is 2 percent. What is the forward rate according to the pure expectations theory? Group of answer choices 2.25% 2.20% 2.00% 2.40%
Q1 (Exercise 5.5) Suppose you are a market-maker in S&R index forward contracts. The S&R index spot price is 1100, the continuously compounded risk-free rate is 5%, and the dividend yield on the index is 0. a. What is the no-arbitrage forward price for delivery in 9 months? b. Suppose a customer wishes to enter a short index futures position. If you take the opposite position, demonstrate how you would hedge your resulting long position using the index and borrowing or lending. c. Suppose a customer wishes to enter a long index futures position. If you take the opposite position, demonstrate how you would hedge your resulting short position using the index and borrowing or lending.