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2011912181950 - MFIN6003 Derivative Securities Dr Huiyan...

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MFIN6003 Derivative Securities Dr. Huiyan Qiu 1 Individual Assignment #1 Due: September 23, Friday 1. Suppose you desire to short-sell 400 shares of JKI stock, which has a bid price of $25.12 and an ask price of $25.31. You cover the short position 180 days later when the bid price is $22.87 and the ask price is $23.06. (a) Taking into account only the bid and ask prices (ignoring commissions and interest), what profit did you earn? (b) Suppose that there is a 0.3% commission to engage in the short-sale (this is the commission to sell the stock) and a 0.3% commission to close the short-sale (this is the commission to buy the stock back). How do these commissions change the profit in the previous answer? (c) Suppose the effective 6-month interest rate is 3% and that you are paid nothing on the short-sale proceeds. How much interest do you lose during the 6 months in which you have the short position? 2. (a) Suppose you enter into a long 6-month forward position at a forward price of $50. What is the payoff in 6 months for prices of $40, $45, $50, $55, and $60? (b) Suppose you buy a 6-month call option with a strike price of $50. What is the payoff in 6 months at the same prices for the underlying asset? (c) Comparing the payoffs of parts (a) and (b) , which contract should be more expensive (i.e. the long call or long forward)? Why? 3. Suppose XYZ stock pays no dividends and has a current price of $50. The forward price for delivery in 1 year is $55. Suppose the 1-year effective annual interest rate is 10%.
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