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by: Kwan

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# Derivatives, Study Guide for Quiz 1 BU.232.710.W4.SP16

Marketplace > Johns Hopkins University > Finance > BU.232.710.W4.SP16 > Derivatives Study Guide for Quiz 1
Kwan
JHU

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Futures and Forward & Pricing
COURSE
Derivatives
PROF.
Federico Bandi
TYPE
Study Guide
PAGES
2
WORDS
KARMA
50 ?

## Popular in Finance

This 2 page Study Guide was uploaded by Kwan on Tuesday January 26, 2016. The Study Guide belongs to BU.232.710.W4.SP16 at Johns Hopkins University taught by Federico Bandi in Spring 2016. Since its upload, it has received 49 views. For similar materials see Derivatives in Finance at Johns Hopkins University.

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Date Created: 01/26/16
! Q1! The\$spot\$price\$of\$oil\$is\$\$80\$per\$barrel\$and\$the\$cost\$of\$storing\$a\$barrel\$of\$oil\$for\$one\$year\$is\$\$3 \$to\$be\$paid\$in\$ two\$semi:annual\$installments\$ at\$the\$beginning\$of\$each\$6 :month\$period.\$The\$risk:free\$interest\$rate\$is\$5%\$ per\$annum,\$continuously\$compounded.\$What\$is\$a\$meaningful \$upper\$bound\$for\$the\$one :year\$futures\$ price\$of\$oil?\$\$ ! ! Q2! Today\$the\$spot\$exchange\$rate\$between\$the\$Swiss\$ Franc\$and\$the\$U.S.\$dollar\$is\$1.07 \$(\$\$per\$Franc).\$Assume\$ that\$ interest\$ rates\$ in\$ the\$ U.S.\$ and\$ Switzerland\$ are\$ 0.25%\$ and\$ 0.1%\$ per\$ annum,\$ respectively,\$ with\$ continuous\$compounding.\$\$ (a)! What\$is\$the\$three :month\$forward\$exchange\$rate\$of\$the\$Swiss\$Franc? \$ (b)! If\$the\$ three:month\$ forward\$ exchange\$ rate\$were\$1.06\$(\$\$per\$Franc),\$there\$would\$be\$an\$arbitrage\$ available.\$Please\$provide\$the\$details\$ of\$a\$suitable\$arbitrage\$strategy .\$ \$ ! ! A1:!The!present!value!of!the!storage!cost !per!barrel!is!\$1.5+\$1.5e =0.05×0.=!\$2.963.!! The!upper!bound!for!the!one=year!futures!price!is!(\$80+\$2.963)e 0.05×1=!\$87.21.! A2:! (0.0025−0.001)×0.25! (a)!The!no=arbitrage!three=month!forward!exchange!rate!is!1.07e =!1.0704.!! (b)! (1)! Borrow!X!Swiss!Francs!at!0.1%!per!annum!(for!three!months),!(2)!convert!the!Francs!into!1.07X! US!\$!to!be!invested!at!0.25%!per!annum !(for!three=month),!and!(3)!enter!into!a!three=month!forward! contract!to!buy!Xe (0.001)×0.!Swiss!Francs!at!1.06!(i.e.,!the!forward!rate).\$ In!three!month,!the!arbitrageur!has!1.07Xe 0.0025×0.25=!1.070669X! US!\$!from!the!investment.!Of!this,! 0.001×0.25! 0.001×0.25! ! 1.06Xe =! 1.060265X! US!\$! are! used! to! purchase! ! Xe ! Francs! under! the! terms! of! the! forward! contract! and! re=pay! the! initial! loan.! The! arbitrage! profit! is,! theref ore,! ! ! (1.070669! –! 1.060265)*X. !!!!!!! !

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