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# notes - Department of Economics University of California...

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Unformatted text preview: Department of Economics University of California, Berkeley Fall 2008 Economics 136: Financial Economics Office Hour and Other Miscellaneous Questions/Clarifications December 15, 2008 1. Forward Price Forward price 6 = Price of a forward Forward price , F T , is the agreed upon price determined today to be paid at time T . Can use the Spot- Forward Parity to determine this: F T = S · (1 + cost of carry) T Price of a forward contract is 0. We need to be careful with notation. For Sample Midterm B, Part II, 4. Derivatives, (c), the solutions don’t state it explicitly, but it should be X = F T 2. Sample Midterm A, Part II, 3. Derivatives, f Need to find : Covariance of return on the market index and the return on investing in the put between t = 0 and t = 1. Recall our formulas for covariance. Cov [ X, Y ] = N X i =1 ( X ( s i )- E [ X ])( Y ( s i )- E [ Y ]) Pr ( s i ) = E [( X- E [ X ])( Y- E [ Y ])] = E ( X · Y )- E ( X ) · E ( Y ) We know that there are two states: either the market index goes up by 15 points or down by 5 points.We know that there are two states: either the market index goes up by 15 points or down by 5 points....
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## This note was uploaded on 12/25/2010 for the course PO 137 taught by Professor Power during the Fall '10 term at Berkeley.

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notes - Department of Economics University of California...

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