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The (at market) forward price is $200.00 The risk-free continuously compounded i

ID: 2724790 • Letter: T

Question

The (at market) forward price is $200.00 The risk-free continuously compounded interest rate is 6.0%

Konami Securities holds a short forward position in MI and then buys a 195 call option. Complete the table below describing the payoff and profit derived from this strategy. Also diagram the profit function. Be sure to label the critical values on the diagram including: i. maximum profit ii. minimum profit iii. the break-even point iv. the location of any “kinks” in the profit diagram

Value At Expiration

B). If MI pays a continuously compounded dividend of 2% what is today’s stock price, assuming the market is efficient?

Strike Call Put 190 12.98 3.56 195 10.00 5.30 200 7.52 7.52 205 5.48 10.18 210 3.88 13.30

Explanation / Answer

To day's stock price =forward price/e^x

=200/2.718^(.06-.02)

=$ 192.15

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