Quiz 11 P

# Quiz 11 P - gives to \$40 at time zero which grows to 40 e...

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ACTSC 231 Quiz 11 pink 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 ) = 12 and v ( i ) = 11 : 4 v ( i ) = v d ( i ) = ) v = v ( i ) d ( i ) = 11 : 4 12 = 0 : 95 c ( i ) = 12 (12 + 1) ( : 95) 2 = 140 : 79 2. P ( i ) = 5(1 : 04) i : 04 = 104 = ) i = 5(1 : 04)+104( : 04) 104 = 0 : 09 P 0 ( i ) = 5(1 : 04) ( i : 04) 2 = ) v ( i ) = P 0 ( i ) P ( i ) = 1 i : 04 = ) d ( i ) = (1 + i ) v ( i ) d (9%) = (1 : 09) 1 : 09 : 04 = 21 : 8 3. K = 40 e : 06(2) = \$45 : 10 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 \$43 in 2 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(2) = \$45 : 10 by the end of 2 years. At time 2 you buy the stock at the agree appond price of \$43. Then you close the short sale (return to stock you borrowed at time zero). This nexts you 45 : 10 & 43 = \$2 : 10 risk free pro&t. 1...
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