# 0s - THE UNIVERSITY OF HONG KONG FACULTY OF BUSINESS AND...

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1 THE UNIVERSITY OF HONG KONG FACULTY OF BUSINESS AND ECONOMICS FINA0301CDE - DERIVATIVES First Semester, 2009-2010 Tutorial 0 Problem Set Solution – Overview / Revision c Practice Questions Question 1 (a) With annual compounding, the return is: 1 . 0 1 1000 1100 = - (b) With semi-annual compounding, the return is R where 0976 . 0 0488 . 1 1 . 1 2 1 1100 ) 2 1 ( 1000 2 = = = + = + R R R (c) With monthly compounding, the return is R where 0957 . 0 00797 . 1 1 . 1 2 1 1100 ) 12 1 ( 1000 12 12 = = = + = + R R R (d) With continuous compounding, the return is R where 0953 . 0 1 . 1 ln 1 . 1 1100 1000 = = = = R R e e R R Question 2 (a) The investor is obligated to sell pounds for 1.5000 when they are worth1.4900. The gain is (1.5000 – 1.4900) × 100,000 = \$1,000.

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FINA0301 – Tutorial 0 Solution Mr. Clive Man Chung HO 2 (b) The investor is obligated to sell pounds for 1.5000 when they are worth 1.5200. The loss is (1.5200 – 1.5000) × 100,000 = \$2,000. Question 3 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 0.5 years. We have:
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0s - THE UNIVERSITY OF HONG KONG FACULTY OF BUSINESS AND...

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