Unformatted text preview: fractional units of the S&P index is required if the bond is to sell at par? 5. Assume that the volatility of the S&P index is 30% and consider a bond with the payoff S2 + λ × [max (0, S2 – S0) – max (0, S2 – K)]. (a) If λ = 1 and K = $1500, what is the price of the bond? (b) Suppose K = $1500. For what λ will the bond sell at par? (c) If λ = 1, for what K will the bond sell at par? 6. Suppose we have a bond that after 2 years pays one barrel of oil plus λ × max (0, S2 – $20.90), where S2 is the year 2 spot price of oil. If the bond is to sell for $20.90 and oil volatility is 15%, what is λ? (Hint: the lease rate (dividend yield) for the oil is not zero but the number implied by the given information.) 6 FINA0301 Derivatives Dr. Huiyan Qiu Peer Review on Group Assignment Group assignment accounts for 25% of total score for the course. Please complete and submit the peer review form by the same date as the last assignment due date. (Email to [email protected] or drop a copy in Clive’s mailbox.) Without submitting a peer review form is considered as you being happy with all your group mates and every group mates receive 10 points (according to your review). The review is confidential and no information will be released to any student. Your name: . Group number: Please revie...
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- Spring '12
- Derivatives, Harshad number, Dr. Huiyan Qiu