1) Assume the spot price of pork bellies is 74.50 cents per pound and the 2-year

Question

1) Assume the spot price of pork bellies is 74.50 cents per pound and the 2-year forward price is 77.30 cents. Annualized 1-year and 2- year YTMs are 5.0% and 5.2%, respectively. For a commodity-linked note to sell at par, what is the annual coupon? (Use the discrete compounding.)

I know the answer should be C, please show me how to get this

(a) 2.24 cents (b) 2.42 cents (c) 2.51 cents (d) 2.65 cents

2) 1-year 0.93-strike European call on the euro is $0.0571. The exchange rate is $0.95/euro. The dollar-denominated interest rate is 6% and the euro-denominated interest rate is 4%. what is the price of 1-year 0.93-strike European put premium?

I know the answer is supposed to be B, please explain how to get this

(a) 0.012 (b) 0.020 (c) 0.027 (d) 0.035

3) The exchange rate is ¥95/Euro, the yen-denominated interest rate is 1.5%, the euro-denominated interest rate is 3.5%, and the exchange rate volatility is 10%. Consider a 1/90-strike euro-denominated yen call with 6 months to expiration. What is delta of this call option?

I know this is supposed to be C, please explain how to calculate

(a) 0.0322 (b) 0.1231 (c) 0.2755 (d) 0.4133

Explanation / Answer

Answer 1 : Annual coupon = 2.51 cents/Pound which is option "C" (see below calculation)

Given that Spot price = 74.5 cents/Pound, Forward Price of 2 year = 77.3 Cents/Pound and yield for 2 year =5.2%.

Let anuual coupons be X. Now we know that note which is linked to this commodity will get X in year 1, X in year 2 and further repayment of 77.30 in Year 2. Discounting all three we will get spot price.

Therefore X*1/(1+0.052)1 + X * 1/(1+0.052)2 + 77.3* 1/(1+0.052)2 = 74.5

Or  X/1.052 + x/(1.106704) + 69.8470 =74.5

Or X = 2.51 cents/Pound

Note : There are three different questions in this particular questions. I have answered first question with detail So please ask each other question separately.

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