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

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1 THE UNIVERSITY OF HONG KONG FACULTY OF BUSINESS AND ECONOMICS FINA0301 - DERIVATIVES Second Semester, 2008-2009 Tutorial 4 Problem Set – Chapter 5,6 & 7 c Chapter 5 & 6 Question 1 (Annualized Forward Premium) Suppose the stock price is $35 and the continuously compounded interest rate is 5%. (a) What is the 6-month forward price, assuming dividends are zero? (b) If the 6 month forward price is $35.50, what is the annualized forward premium? (c) If the forward price is $35.50, what is the annualized continuous dividend yield? Question 2 * (Cash and Carry Arbitrage) The S&R index spot price is 1100 and the continuously compounded risk-free rate is 5%. You observe a 9-month forward price of 1129.257. (a) What dividend yield is implied by this forward price? (b) Suppose you believe the dividend yield over the next 9 months will be only 0.5%.What arbitrage would you undertake? (c) Suppose you believe the dividend yield will be 3% over the next 9-months. What arbitrage would you take? Question 3 * (Marked to Market) Suppose the S&P 500 index is currently 950 and the initial margin is 10%. You wish
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4 - THE UNIVERSITY OF HONG KONG FACULTY OF BUSINESS AND...

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