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MA373 F11 Test 4

MA373 F11 Test 4 - Math 373 Final Fall 2011 1(4 points Lexi...

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Math 373 Final Fall 2011 December 17, 2011 1. (4 points) Lexi purchase a one year call option on the stock of Coghlan Corporation. The call option has a strike price of 50. The premium for the call option is 2. The current price of Coghlan stock is 45 and the stock does not pay a dividend. The annual effective risk free interest rate is 10%. Complete the following table. Show your work! Spot Price at Expiration Payoff Future Value of Cost Profit 40 45 50 55

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2. (6 points) Ang purchases 100 shares of Wang Corporation. Ang pays commissions of 0.10 per share. At the exact same time, Yifei sells 100 shares of Wang Corporation. Yifei pays commissions of 2.5% of the selling price. The bid-ask prices of Wang corporation are 30.00 and 30.50. Determine the total transaction costs involved in these transactions.
3. (1 point) The current spot price of a stock is 25. The stock does not pay a dividend. The one year forward price of the stock is 27.50. The annual effective risk free interest rate is 10%. Therefore, there is no arbitrage. True or False 4. (1 point) A buyer of a collar benefits from the underlying asset increasing in value. True or False

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5. (6 points) The current price of the stock of Li LTD is 60. Li LTD pays a quarterly dividend of 4. The next dividend will be paid in 2 months. Anthony buys a six month prepaid forward contract on Li Stock. The annual risk free interest rate compounded continuously is 6%. Calculate the price of the prepaid forward contract.
6. (3 points) List the three elements that are necessary for arbitrage.

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7. (6 points) You are given the following:
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