Topic 6 Warm Up Problems

# Topic 6 Warm Up Problems - equal to 2% (assume continuous...

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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? 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%? 2a) What if interest and dividends are compounded continuously? 3. Company X is looking to hedge its risk exposure in oil price volatility. Currently oil is selling for \$30 per barrel. What forward price can you expect if the risk free rate is 5%, the convenience yield is 3% and storage costs are
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Unformatted text preview: equal to 2% (assume continuous compounding)? 4. If you are offered a one-year equity forward contract for \$50 and the stock is currently trading for \$48, what must the risk free rate be if there is no arbitrage (assume continuous compounding and no dividends paid)? 4a) If the dividend yield is 2%, what is the risk free rate? 4b) If the dividend yield is 2% and assuming annual compounding, what is the risk free rate? 5. Your company is expecting revenues of 2,000,000 euros at the end of the year from the European headquarters. You are concerned about exchange rate fluctuations. You are able to lock in a futures price of \$1.2/euro. What happens if the exchange rate falls to \$.80/euro? 5a) What if the exchange rate goes up to \$1.6/euro?...
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## This document was uploaded on 06/09/2010.

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