{[ promptMessage ]}

Bookmark it

{[ promptMessage ]}

# Assignment 2Answers - Comm 374 Assignment#4 Question1 a...

This preview shows pages 1–3. Sign up to view the full content.

Comm 374 Assignment #4 Question1 a) Using the course formula gives F=S(1+R)= 40*1.04 = \$41.60 b) Hedging a long forward position is going to be less costly due to dividend. Using the duplication argument (see the table in Slide 13) it can be shown that F=(S –PV(D)) (1+R)= (40 -2/1.04^0.75)*1.04= \$39.58. Another method will lead to the same conclusion is to assume that XYZ delivered a dividend of FV(D)=2*1.04^0.25 at the end of year in which case the formula of slide 13 is directly applicable: F=40*.104 - 2*1.04^0.25=\$39.58. c) F = 45*(1.04)^0.5=\$45.89. Question2: a. It is easy to check that R2=4%, R3=4.5% and R1=4.26% b. We construct a cash and carry strategy whereby we short the forward, we buy Bond 3 and borrow its price (98.68), we get the no arbitrage price F=98.67*1.0426 – 4 =98.67 Question3. a. First you calculate the stock tree: 48.4 44 40 39.6 36 32.4 The option payoff at the end (last three nodes) are 0 2.4 9.6 Then using the method in the course, you can easily derive the delta/B to calculate by backward induction the price in each node. The result is B 12.80988 delta -0.27273 0 0.80988 1 Delta -0.4936 2.1184 8 2.4 1

This preview has intentionally blurred sections. Sign up to view the full version.

View Full Document
B 21.8626 4 4.75871 2 delta -1 9.6 B 40.75871
This is the end of the preview. Sign up to access the rest of the document.

{[ snackBarMessage ]}

### What students are saying

• As a current student on this bumpy collegiate pathway, I stumbled upon Course Hero, where I can find study resources for nearly all my courses, get online help from tutors 24/7, and even share my old projects, papers, and lecture notes with other students.

Kiran Temple University Fox School of Business ‘17, Course Hero Intern

• I cannot even describe how much Course Hero helped me this summer. It’s truly become something I can always rely on and help me. In the end, I was not only able to survive summer classes, but I was able to thrive thanks to Course Hero.

Dana University of Pennsylvania ‘17, Course Hero Intern

• The ability to access any university’s resources through Course Hero proved invaluable in my case. I was behind on Tulane coursework and actually used UCLA’s materials to help me move forward and get everything together on time.

Jill Tulane University ‘16, Course Hero Intern