a1 - ActSc 446/846 Winter 2006 Assignment 1 Due Date: Jan...

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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 10-year 8% coupon bond currently sells for $90. A 10-year 4% coupon bond currently sells for $80. What is the 10-year zero rate? 3. Suppose that you enter into a six-month forward contract on a non-dividend-paying stock when the stock price is $30 and the risk-free interest rate (with continuous compounding) is 12% per annum. What is the forward price? Explain your reason clearly. 4. Suppose that the risk-free 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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