5 chapter 5 1 quiz 53 answer see the textbook 2 quiz

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5 Chapter 5 1. Quiz 5.3 Answer: see the textbook 2. Quiz 5.4 Answer: see the textbook 3. Problem 5.12 Suppose that the risk-free interest rate is 10% per annum with continuous compounding and that the dividend yield on a stock index is 4% per annum. The index is standing at 400, and the futures price for a contract deliverable in four months is 405. What arbitrage opportunities does this create? How can you arbitrage? Answer: Theoretical futures price F = 400*e (0.1-0.04)(4/12) = 408.08 and the actual futures price in the market F = 405 < 408.08, which is undervalued Arbitrage: Today: buy futures contracts at 405; short sell stock index at 400 and deposit short sale proceeds at 10% for four months After four months: collect 413.56; take the delivery and pay 405; return the asset plus dividend (5.37); arbitrage profit = 413.56 – 405 – 5.37 = 3.19, PV of profit = $3.08 Chapter 6 1. Quiz 6.2 Answer: see the textbook 2. Problem 6.9 Answer: AI = 6*98/181 = 3.2468 (there are 98 days between January 27 and May 5 and there are 181 days between January 27 and July 27) Cash price = 110.5312 + 3.2468 = 113.7798 3. Problem 6.10 Answer: Bond 1: net cost = 2.178 Bond 2: net cost = 2.652 Bond 3: net cost = 2.946 Bond 4: net cost = 1.874 Bond 4 is the cheapest to deliver Chapter 7 1. Quiz 7.1 Answer: see the textbook 2. Quiz 7.3 Answer: see the textbook
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