Quiz 11 B - gives to $40 at time zero, which grows to 40 e...

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ACTSC 231 Quiz 11blue solutions 1. For an n-year zero coupon bond d ( i ) = n , v ( i ) = nv and c ( i ) = n ( n + 1) v 2 d ( i ) = 16 and v ( i ) = 15 : 2 v ( i ) = v d ( i ) = ) v = v ( i ) d ( i ) = 15 : 2 16 = 0 : 95 c ( i ) = 16 (16 + 1) ( : 95) 2 = 245 : 48 2. P ( i ) = 4(1 : 03) i : 03 = 103 = ) i = 4(1 : 03)+103( : 03) 103 = 0 : 07 P 0 ( i ) = 4(1 : 03) ( i : 03) 2 = ) v ( i ) = P 0 ( i ) P ( i ) = 1 i : 03 = ) d ( i ) = (1 + i ) v ( i ) d (7%) = (1 : 07) 1 : 07 : 03 = 26 : 75 3. K = 40 e : 06(4) = 50 : 85 To take advantage of the miss pricing. Short sell the stock at time zero and enter into a forward contract to buy the stock for $48 in 4 years time. Place the proceeds from the short sale into the risk-free investment. The short sale
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Unformatted text preview: gives to $40 at time zero, which grows to 40 e : 06(4) = $50 : 85 by the end of 4 years. At time 4 you buy the stock at the agree appond price of $48. Then you close the short sale (return to stock you borrowed at time zero). This nexts you 50 : 85 & 48 = 2 : 85 risk free pro&t. 1...
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