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Unformatted text preview: 1 Homework 1. Owning a single share of stock pays dividends of $1 in 3 months and 6 months. If the current stock value is 56 and the continuous interest rate is 7 . 5%, find the price of a 1 year forward contract. Solution: • S = 56 • r = . 075 • F , 1 = F P , 1 e . 075 = 56 e . 075 * 3 12 e . 075 * 6 12 e . 075 = 58 . 265 2. Find the price of a 4year prepaid forward contract if a stock’s current price is 70, the continuous interest rate is 8%, and the continuous interest rate is 5%. Solution: • F P , 4 = 70 e . 08 * 4 = 50 . 83 3. The current stock price is $200. You expect the stock to decrease in price and purchase a 3month 180strike put option for 3 . 34. What is your annual rate of return if the stock price in 3 months is $100, $150, or $200. Find the corresponding annual rates of return if you bought the stock initially rather than purchasing a put option. Solution • P ( 180 , 3 12 ) = 3 . 34 • (amount invested) (1 + i ) t = return at t • Ending stock prices: $100, $150, or $200...
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 Fall '10
 TimKnapik
 Continuous Interest Rate

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