Homework One

Homework One - MAFS 5030 Quantitative Modeling of...

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Unformatted text preview: MAFS 5030 Quantitative Modeling of Derivatives Securities Homework One Course Instructor: Prof. Y.K. Kwok 1. Consider a one-year forward contract whose underlying asset is a coupon paying bond with maturity date beyond the expiration date of the forward contract. Assume that the bond pays coupon semi- annually at the coupon rate of 8%, and the face value of the bond is $100 (that is, each coupon payment is $4). The current market price of the bond is $94 . 6, and the previous coupon has just been paid. Taking the riskless interest rate to be at the constant value of 10%, find the forward price of this bond forward. Hint: The coupon payments may be considered as negative cost of carry. 2. Consider an interest rate swap of notional principal $1 million and remaining life of 9 months, the terms of the swap specify that six-month LIBOR is exchanged for the fixed rate of 10% per annum (quoted with semi-annual compounding). The market prices of unit par zero coupon bonds with maturity dates 3 months and 9 months from now are $0 . 972 and $0 . 918, respectively, while the market price of unit par floating rate bond with maturity date 3 months from now is $0 . 992. Find the value of the interest rate swap to the fixed-rate payer, assuming no default risk of the swap counterparty....
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Homework One - MAFS 5030 Quantitative Modeling of...

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