ECON6042 Financial Derivatives 2016-17
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SEMESTER 2 EXAMINATIONS 2016-17
ECON6042 Financial Derivatives
1. Companies x and Y have been offered the following rates per annum on a $1 million 1-year investment loan:
|
Fixed rate |
Floating rate |
Company X Company Y |
5% 5% |
LIBOR LIBOR+0.4% |
Company x requires a fixed-rate loan and Company Y requires a floating-rate loan.
(a) Discuss the reasons why these two companies could be interested
in entering into a swap agreement.
(b) Design a swap that is equally attractive to both x and Y.
(c) At the start of the contract, find the value of the 1-year swap contract that guarantees the exchange of cash flows between the two parties every six months. Assume that LIBOR for 6 months is 4.5% and LIBOR for 1 year is 5.5%. Compute the value of the swap from the point of view of Company X.
2. The stock price of Audi is $29, and a dividend of $0.50 is expected in two months and again in 5 months. The term structure is flat, with all risk-free interest rates being 10%.
(a) Assume the existence of a European put option on this stock that expires in 6 months and has a strike price of $30. Derive the minimum price of the European put option at time 0 that is compatible with the absence of arbitrage opportunities. Explain your answer.
(b) Assume now that in this market there is also a European call option on the same stock with same maturity and strike price as the above put option with price c0 = $4. At time 0, what is the no-arbitrage price of this European put option?
(c) Explain the arbitrage opportunities in the market defined in (b)
if the European put price is $5.
3. Answer the following questions:
(a) Discuss the differences between a combination and a spread
when constructing portfolios of options.
(b) Define a long straddle and represent the profit function.
(c) Define a long strangle and represent the profit function.
2022-05-18