Topic 6 Warm Up Problems with Solutions

Topic 6 Warm Up Problems with Solutions - Warm up Problems...

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Warm up Problems for Topic 6 (Forwards and Futures) **These questions are designed to represent elementary principles, and are NOT representative of problems that you will find on any exams. 1. If Stock A is currently trading for $25 and the risk free rate is 8% compounded annually, what is the value of a two-year equity forward contract if no dividends are expected? F=S 0 (1+r) T -D F=$25(1.08) 2 -$0 F=$29.16 2. What is the value of a one-year equity forward contract if a stock is currently trading at $15, the risk free rate is 6% compounded annually, and the stock currently has a dividend yield of 3%? F=S 0 ((1+r)/(1+d)) T F=$15(1.06/1.03) 1 F=$15.44 2a) What if interest and dividends are compounded continuously? F=S 0 e (r-d)T F=$15e (.06-.03)1 F=$15.46 3. Company X is looking to hedge its risk exposure in oil price volatility. Currently oil is selling for $30 per barrel. What two-year forward price can you expect if the risk free rate is 5%, the convenience yield is 3% and storage costs are equal to 2% (assume continuous compounding)? F=S
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This document was uploaded on 06/09/2010.

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Topic 6 Warm Up Problems with Solutions - Warm up Problems...

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