Solutions to the selected questions in chapter 5
Question 5.2
a) The owner of the stock is entitled to receive dividends. As we will get the stock only
in one year, the value of the prepaid forward contract is todays stock price, less the
present value of

Question 7.1
Using the bond valuation formulas (7.1), (7.3), (7.6) we obtain the following yields and
prices:
Maturit
y
Zero-Coupon
Bond Yield
Zero-Coupon
Bond Price
One-Year
Implied Forward
Rate
Par
Coupon
Cont. Comp.
Zero Yield
1
0.04000
0.96154
0.04000

Sample Multiple Choice
Questions-Carol
1. Interest rate swaps involve
counterparties who want to .
A. exchange a floating rate debt for a fixed
rate debt
B. exchange debt for stock
C. exchange a short-term loan for a longterm loan
D. all of the above
2. O

Carol
Answer to (a):
A short sale of JKI stock entails borrowing
shares of JKI, then selling them at the bid
price and receiving the proceeds from the
sale (ignoring the commissions and interest):
400 ($25.12).
After 180 days, we cover the short position

Box Spread Example
A box spread is a position involving a bull and bear spread
with identical expiry dates. We can create a box spread
using calls for the bull spread and puts for the bear spread
bull spread long a call with strike price K1 and short a
ca

ASS2557b Financial Markets and Investments, Winter 2014
Solutions to selected questions in Chapter 3
3.2 Let ST be the spot price of the S&R Index at T . The payo of the short index and short put
position is
ST
if ST > 1000
f (ST ) = ST (1000 ST )+ =
.
10

Solutions to ex 4.1 to 4.7
Question 4.1
The following table summarizes the unhedged and hedged profit calculations:
Copper price in
one year
Total cost
Unhedged profit
Profit on short
forward
Net income on
hedged profit
$0.70
$0.90
$0.20
$0.30
$0.10
$0.80

Selected questions for chapter 1:
1.1, 1.2, 1.7, 1.9, 1.12, 1.13,
Question 1.1
This problem offers different scenarios in which some companies may have an interest to hedge
their exposure to temperatures that are detrimental to their business. In answerin

Answers for selected questions in Chapter 3
Question 3.11
In order to be able to draw the profit diagram, we need to find the future value of the
costs of establishing the suggested position. We need to finance the index purchase, buy
the 950-strike put,

Use the following zero-coupon bond prices to answer questions 1 to 5:
Maturity (years)
Bond Prices ($)
1
0.98
2
0.97
3
0.93
4
0.87
5
0.83
1). What is the effectIve annual zero-coupon bond YIeld for a 3 year term?
A) 1.535%
(B2.449%
<=)5.489%
D) 7.527%
2).