4 s - 1 THE UNIVERSITY OF HONG KONG FACULTY OF BUSINESS AND...

Info iconThis preview shows pages 1–4. Sign up to view the full content.

View Full Document Right Arrow Icon

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon
This is the end of the preview. Sign up to access the rest of the document.

Unformatted text preview: 1 THE UNIVERSITY OF HONG KONG FACULTY OF BUSINESS AND ECONOMICS FINA0301 - DERIVATIVES Second Semester, 2008-2009 Tutorial 4 Problem Set Solution – Chapter 5,6 & 7 c Chapter 5 & 6 Question 1 (a) We plug the continuously compounded interest rate and the time to expiration in years into the valuation formula and notice that the time to expiration is 6 months, or 0.5 years. We have: (b) The annualized forward premium is calculated as: (c) For the case of continuous dividends, the forward premium is simply the difference between the risk-free rate and the dividend yield: We can solve: Question 2 (a) We plug the continuously compounded interest rate, the forward price, the initial index level and the time to expiration in years into the valuation formula and solve for the dividend yield: FINA0301 – Tutorial 4 Solution Mr. Clive Man Chung HO 2 (b) With a dividend yield of only 0.005, the fair forward price would be: Therefore, if we think the dividend yield is 0.005, we consider the observed forward price of 1,129.257 to be too cheap. We will therefore buy the forward and create a synthetic short forward, capturing a certain amount of $8.502. We engage in a reverse cash and carry arbitrage: (c) With a dividend yield of 0.03, the fair forward price would be: Therefore, if we think the dividend yield is 0.03, we consider the observed forward price of 1,129.257 to be too expensive. We will therefore sell the forward and create a synthetic long forward, capturing a certain amount of $12.637. We engage in a cash and carry arbitrage: FINA0301 – Tutorial 4 Solutions Mr. Clive Man Chung HO 3 Question 3 (a) The notional value of 10 contracts is 10 × $250 × 950 = $2 , 375 , 000, because each index point is worth $250, we buy 10 contracts and the S&P 500 index level is 950. With an initial margin of 10% of the notional value, this results in an initial dollar margin of $2 , 375 , 000 × 0 . 10 = $237 , 500....
View Full Document

Page1 / 8

4 s - 1 THE UNIVERSITY OF HONG KONG FACULTY OF BUSINESS AND...

This preview shows document pages 1 - 4. Sign up to view the full document.

View Full Document Right Arrow Icon
Ask a homework question - tutors are online