ActSc 446/846 Winter 2006
Assignment 1
Due Date: Jan 23 (Monday),2006, On the class
1. Describe the profit from the following portfolio: a long forward contract on an underlying
asset, and a long European put option on the asset with the same maturity as the forward
contract. The strike price of the option is equal to the forward price of the underlying asset
as the time the portfolio is set up.
2. A 10year 8% coupon bond currently sells for $90. A 10year 4% coupon bond currently sells
for $80. What is the 10year zero rate?
3. Suppose that you enter into a sixmonth forward contract on a nondividendpaying stock
when the stock price is $30 and the riskfree interest rate (with continuous compounding) is
12% per annum. What is the forward price? Explain your reason clearly.
4. Suppose that the riskfree interest rate is 10% per annum with continuous compounding and
that the dividend yield on a stock index is 4% per annum. The index is standing at $400,
and the forward price for a contract deliverable in four months is $405. Does there exist an
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 Winter '09
 Adam
 Derivative, Strike price

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