1) Assume oil forward prices for 1 year, 2 years, and 3 years are 20, 21, and 22

Question

1) Assume oil forward prices for 1 year, 2 years, and 3 years are 20, 21, and 22. The 1-year effective annual interest rate is 6%, the two year rate is 6.5%, and the 3-year rate is 7%. Suppose you enter the swap contract. How much do you over- or under-pay relative to the forward price after the first swap settlement?

I know the answer is B, please show me how to get this

(a) Overpaying $0.9519 (b) Overpaying $0.0481 (c) Underpaying $0.9519 (d) Underpaying $0.0481

2) The price of a ABC stock is $39. The 40-strike European call option with 3 months time to expiration on this stock costs $2.78. The stock pays $5 dividend just before the expiration. The interest rate is 3%. What is the European put premium with the same strike price and the same time to maturity?

I know the answer is A, please show me how to get this

(a) 6.42 (b) 7.41 (c) 8.44 (d) 9.43

3) The prices of 1, 2, 3, and 4-year zero coupon government bonds are 95.42, 90.36, 85.16, and 78.81, respectively. What is the implied 2-year forward rate between years 2 and 4?

I know the answer is C, please show me how to calculate this on my own

(a) 4.8% (b) 7.1% (c) 10.4% (d) 14.7%

Explanation / Answer

QUESTION 1

We first solve for the present value of the cost per three barrels, based on the forward prices

Hence we could spend $55.3413 today to receive 1 barrel in each of the next three years.

hence overpaid =21-20.9519 = Overpaying $0.0481

Forward rate pv fACTOR PV Value 20 0.943396226 18.86792 21 0.881659283 18.51484 22 0.816297877 17.95855 55.34132

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