hw1sol - Math 194 Winter 2010 Homework 1 Solutions 1 A...

Info icon This preview shows page 1. Sign up to view the full content.

View Full Document Right Arrow Icon
Math 194, Winter 2010 Homework 1 — Solutions 1. A forward contract is an agreement to buy or sell an asset at a certain future time for a certain price (called the forward price ). At the time a forward contract is entered into, no money changes hands. The investor who agrees to buy the asset at the future time is said to hold the long position in the contract and the investor who agrees to sell the asset is said to hold the short position in the contract. Suppose that a stock is currently selling for $20 per share. A (long position in a) forward contract is available to buy 100 shares of the stock 3 months from now for $20.20 per share. Suppose that a bank is offering interest at the rate of 5% per annum (compounded continuously) on a 3-month deposit. Describe a strategy for creating an arbitrage profit and compute the amount of the profit. Solution. At time 0, we borrow 100 shares of the stock, sell them immediately for $2000, and put this money in the bank. After 3 months the bank account has grown to $2000 · exp( . 05 · (3 / 12))
Image of page 1
This is the end of the preview. Sign up to access the rest of the document.

{[ snackBarMessage ]}

What students are saying

  • Left Quote Icon

    As a current student on this bumpy collegiate pathway, I stumbled upon Course Hero, where I can find study resources for nearly all my courses, get online help from tutors 24/7, and even share my old projects, papers, and lecture notes with other students.

    Student Picture

    Kiran Temple University Fox School of Business ‘17, Course Hero Intern

  • Left Quote Icon

    I cannot even describe how much Course Hero helped me this summer. It’s truly become something I can always rely on and help me. In the end, I was not only able to survive summer classes, but I was able to thrive thanks to Course Hero.

    Student Picture

    Dana University of Pennsylvania ‘17, Course Hero Intern

  • Left Quote Icon

    The ability to access any university’s resources through Course Hero proved invaluable in my case. I was behind on Tulane coursework and actually used UCLA’s materials to help me move forward and get everything together on time.

    Student Picture

    Jill Tulane University ‘16, Course Hero Intern