1a. Suppose you sell a three-month forward contract at $35. One month later, new
ID: 2729623 • Letter: 1
Question
1a. Suppose you sell a three-month forward contract at $35. One month later, new forward contracts with similar terms are trading for $30. The continuously compounded risk-free rate is 10 percent. What is the value of your forward contract?
a. $4.96 b. $5.00 c. $4.92 d. $4.55 e. none of the above
1b. A deep in-the-money call option on futures is exercised early because
a. the intrinsic value is maximized b. it behaves like a futures but ties up funds c. the futures price is not likely to rise any further d. all of the above e. none of the above
1c. What would be the spot price if a stock index future price were $75, the risk-free rate were 10 percent, the continuously compounded dividend yield is 3 percent, and the futures contract expires in three months?
a. $73.70 b. $77.48 c. $72.60 d. $76.32 e. none of the above
1d. Consider a portfolio consisting of a long call with an exercise price of X, a short position in a non-dividend paying stock at an initial price of So, and the purchase of riskless bonds with a face value of X and maturing when the call expires. What should such a portfolio be worth?
a. C + P – X(1 + r)-T b. C – So c. P – X d. P + So – X(1+r)-T
e. none of the above
1e. Suppose you hold a call option. The stock price has recently been increasing-making your call option more valuable. Through what process might you take advantage of the liquid nature of the options market?
a. offsetting order b. contract reconciliation c. mark to market order
d. settling up e. none of the above
Explanation / Answer
Answer:1a c. $4.92
values of future contract:value =(Ft-F0)e-rt
t= 2/12
Answer:1b d. all of the above
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