PS 4 - Is the forward rate correctly quoted by the bank? If...

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Econ S-1452 Summer, 2010 Problem Set 4 (Due Friday, July 30 ) 1. Consider the following information on put and call options on a stock: Call price, C 0 = $4.50 Put price, P 0 = $6.80 Exercise price, X = $70 Days to expiration = 139 Current stock price, S 0 = $67.32 Risk free rate, r = 5% A. Create the payoff and profit tables and graphs for the long call, short call, long put, and short put positions above. B. Use put-call parity to calculate the prices of the following: i. Synthetic call option ii. Synthetic put option C. For each of the synthetic instruments in (1), identify any mispricings by comparing the actual price with the synthetic price. 2. Your bank has quoted you a 2 year spot rate of 6% and a 5 year spot rate of 8%. Your bank has also quoted you a 3 year forward rate beginning 2 years from today of 10%.
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Unformatted text preview: Is the forward rate correctly quoted by the bank? If not, what should the forward rate be? 3. As a U.S. based importer of shoes from Italy, you will be making a payment in Euro on a shipment of shoes in the next 60 days. You expect that the value of the Euro to increase against the U.S. dollar over the next 60 days and you would like to hedge your currency exposure. The current spot rate is 1.30 US Dollar (USD) per Euro (EUR), the US risk-free rate is 3% while the Euro risk-free rate is 4%. A. How can you use a forward contract to hedge your risk? Briefly explain your answer. B. Calculate the theoretical fair price of the forward contract you should enter into for settlement in 60 days....
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This note was uploaded on 10/21/2010 for the course ECON 1530 taught by Professor Ohly during the Spring '10 term at Dartmouth.

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