# CH08 - CHAPTER 8 1 A one-period strip has a price of \$86...

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CHAPTER 8 1. A one-period strip has a price of \$86 and par value of \$100. A two-period strip has a price of \$88 and par value of \$100. Show the arbitrage opportunity. 0 1 2 | | | Long -86 +100 Short +88 -100 Net +2 +100 -100 Cum Net +2 +102 +2 2. A two-period bond has an annual coupon of \$7, par value of \$100, and price of \$98. Another two-period bond has an annual coupon of \$8, par value of \$100, and price of \$98. Are there any arbitrage opportunities? 0 1 2 | | | Short +98 -7 -107 Long -98 +8 +108 Net 0 +1 +1 Cum Net 0 +1 +2 3. In problem 2, is there an arbitrage opportunity if the \$8-coupon bond has a price of \$98.25? 0 1 2 | | | Short x +98x -7x -107x 0026 . 1 98 25 . 98 x = = Long -98.25 +8 +108 Net 0 +0.98 +0.73 Cum Net 0 +0.98 +1.71 4. In problem 2, suppose the \$8-coupon bond has a price of \$101, are there arbitrage opportunities? 0 1 2 | | | Long -98 +7 +107 Short +101 -8 -108 Net +3 -1 -1 Cum Net +3 +2 +1

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5. The coupon on a two-period par bond is \$9. A one-period strip has a price of \$93.46 and a two-period strip has a price of \$87.34. Are there arbitrage opportunities? Explain. 0 1 2 |____________|____________| Long -100 +9 +109 Short .09 +8.41 -9 Short 1.09 +95.20 -109 ___________________________ Net +3.61 0 0 Cum Net +3.61 +3.61 +3.61 6. Suppose that R 0,1 is 3 percent and R 0,2 is 6 percent. For one-period and two-period strips with \$100 par values, show the operations to create: (a) a long forward position; (b) a short forward position. R 0,1 = 3% R 0,2 = 6% \$97.09 = 1.03 100 = S 1 \$89.00 = ) (1.06 100 = S 2 2 .9167 0 = 97.09 89 = x a. 0 1 2 |________________________|________________________| Long -89.00 +100 Short .9167 +97.09(.9167) -100(.9167) _________________________________________________ Long Forward 0 -91.67 +100 b. 0 1
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CH08 - CHAPTER 8 1 A one-period strip has a price of \$86...

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