In the following situation, assume there are only two possible states in future and the prices of the two assets in future will be as shown. How today's prices will adjust (A1 and Az will come nearer to each other or go further from each other). Calculation not required only comment in one line
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- Two states of nature in the future period, A and B, have the state prices 0.33 and 0.55 today, respectively. Calculate the risk free rate of return (write as a percent upto three decimal places, for example if correct answer is 12.345%, write 12.345)Scenario 2: The following table shows the returns for the market index (Market - M) and the returns for two stocks (Asset X & Y) under three scenarios. Assume each scenario has an equal chance of occurring (33%). Bad Okay Good Market - M-5% 5% 15% Asset - X -2%-3% 25% Asset - Y -4%-6% 30% What is the correlation of "Asset - Y" to "Market M"? enter your number to two decimal places without the percent sign. Example 23% enter as .23.Explain why y0u disagree 0r agree with the f0ll0wings statements. The answer sh0u-ld n0t be m0re than three sentences All 0ther things held c0nstant; the future value of an 0rdinary annuity is always having a higher future value than annuity due. All 0ther things held c0nstant, the price 0r interest rate risk of sh0rt-term b0nd is always l0wer than l0ng-term b0nd. Treasury b0nds are riskier than c0rp0rate b0nds.
- Suppose the exchange rate of euro at current spot market is $1.25/€. If a put option has a strike price of $1.18/€ then we can say this option is a) inthemoney b) outofthemoney c) atthemoney d) past breakevenWhat is the implied volatility of a European call option with the following parameters? c = $3 s0 = $40 k = 41 r = 10% T = 0.5 years (Enter 11.51% as 0.1151. Required precision +/- 0.0002)Market observes the “exchange rates” as of today:($1/$0)=0.95 , ($2/$0)=0.87 1. What is the implied interest rate between time t=0 and t=2 ? 2. Now there is a project with three certain cashflows:CF0=−$10MMCF1=$5MMCF2=$7MMWhat is NPV0? 3. How much is CF1 worth at t=2?
- 2. Suppose the exchange rate of euro at current spot market is $1.25/€. If a call option has a strike price of $1.28/€ then we can say this option is a) inthemoney b) outofthemoney c) atthemoney d) past breakeven 3. Suppose the exchange rate of euro at current spot market is $1.25/€. If a put option has a strike price of $1.18/€ then we can say this option is a) inthemoney b) outofthemoney c) atthemoney d) past breakeven 4. According to our class discussion, suppose a U.S. based real estate developer is participating in a bid competition for a land in London. What of the followings can provide the best protection when Pound is expected to appreciate a) Call options b) buy futures c) sell forwards d) buy forwards 5. Which of following activities dominates foreign exchange transactions a) multinational corporations buying and selling foreign exchange b) importers and exporters buying and selling foreign exchange c) banks buying and selling foreign exchange d)…Consider a state space model. Suppose there are two economic states in the next year.The probability of occurrence of state 1 is 0.29 and the probability of occurrence of state 2 is 0.71. There is a risk-free bond traded in this market with the time 1 payoff of $100. The time 0 price of the bond is $89.71.All primitive state-contingent claims are traded in this market. (a) The time 0 price of the state-contingent claim paying off $1 in state 1 is. What is the price of, the state-contingent claim paying off $1 in state 2? (b) Suppose that there is another security traded in this market: a stock paying $50.0 in state 1, and $100.0 in state 2. What is the time 0 price of the stock? (c) What is the expected return on the risk-free bond (in %)? (d) What is the expected return on the stock? (e) What is the standard deviation of the return of the bond? (f) What is the standard deviation of the return of the stock?A European call that will expire in one year is currently trading for $3. Assume the risk-free rate (based on continuous compounding) is 5%, the underlying stock price is $60 and the strike price is $55. a. Is there an arbitrage opportunity? b. Describe exactly what a trader should do to take advantage of the arbitrage opportunity assuming it exists. c. Determine the present value of the profit that the trader can earn assuming you identify an arbitrage opportunity. Use at least four decimal places for those questions that require a numerical answer.
- H2. Using the Black-Scholes model (BSOPM), compute the standard deviation that is implied by the following call option data as: the time to the option's maturity is 0.25 years, the price of the underlying option asset is RM30, the continuously compounded risk-free interest rate is 0.12. the exercise or striking price is RM30, and the cost or premium of the call is RM1.90.This question will compare two different arbitrage situations. Recall that arbitrage should equalize rates of return. We want to explore what this implies about equalizing prices. In the first situation, two assets, A and B, will each make a single guaranteed payment of $100 in 1 year. But asset A has a current price of $80 while asset B has a current price of $90.a. Which asset has the higher expected rate of return at current prices? Given their rates of return, which asset should investors be buying and which asset should they be selling?b. Assume that arbitrage continues until A and B have the same expected rate of return. When arbitrage ceases, will A and B have the same price?Next, consider another pair of assets, C and D. Asset C will make a single payment of $150 in one year while D will make a single payment of $200 in one year. Assume that the current price of C is $120 and that the current price of D is $180.c. Which asset has the higher expected rate of return at current…a) Assume that call currency option enable to buy of dollar for Shs. 50.00 while it is quotedat Shs. 50.70 in the spot market, and premium paid for call currency option is Shs. 1.00.a)Calculate the intrinsic value of the call? b) Discuss the value of hedging to a firm.