Question 3 (Arbitrage-free forward price) Suppose the stock...

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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 – Overview / Revision Note: This tutorial covers fundamental finance concepts for your own revision and will not be discussed in class. c Practice Questions Question 1 (Annual Percentage Return APR) An investor receives $1,100 in one year in return for an investment of $1,000 now. Calculate the percentage return per annum with: (a) Annual compounding (b) Semi-annual compounding (c) Monthly compounding (d) Continuous compounding Question 2 (Arbitrage) An investor writes a forward to sell 100,000 British pounds for US dollars at an exchange rate of 1.5000 US dollars per pound. How much does the investor gain or lose if the exchange rate at the end of the contract is (a) 1.4900 and (b) 1.5200?
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Unformatted text preview: Question 3 (Arbitrage-free forward price) Suppose the stock price is $35 and the continuously compounded interest rate is 5%. Assuming dividends are zero, what is the 6-month arbitrage-free forward price? c Conceptual Questions Question 4 (Arbitrage and Law of One price) Define arbitrage and the law of one price. What role do they play in our market system? What do we call the “one price” of an asset? FINA0301 – Tutorial 0 Mr. Clive Man Chung HO 2 Question 5 (Forward vs Futures) What are the differences between forward and futures? Question 6 (Hedging, Speculation, and arbitrage) Explain carefully the difference between hedging, speculation, and arbitrage....
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Question 3 (Arbitrage-free forward price) Suppose the stock...

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