2. The spot price of silver is currently $1,350 per ounce. The forward price for delivery...
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2. The spot price of silver is currently $1,350 per ounce. The forward price for delivery in one year is $1,460 per ounce. An arbitrageur can borrow money at 4% per annum. Is the forward price too high or low? Are there arbitrage opportunities? What strategy can an arbitrageur use to earn riskless profits? Be very precise in outlining the steps. Assume that the cost of storing silver is zero and that silver provides no income. (10 points) 3. Your company has a portfolio of stocks that is currently worth $150 million. The beta of the portfolio is 1.3. The company would like to use CME futures on the S&P 500 to immune the portfolio from systematic risk. The index is currently 1,200, and each contract is on $250 times the index. What position (long/short and the number of contracts) should the company take in the futures market? How would the strategy change, if instead, the company decided to increase its exposure to systematic risk and change the beta to 1.9? (10 points) 4. You are investing in an options strategy that involves buying a call option with a strike price of $30, selling two call options with a strike price of $35, and buying another call option with a strike price of $40. Use an excel spreadsheet to figure out what the resultant strategy "payout" looks like. Hint: Use stock price range between $20 and $50 with increments of $2.5 to generate the payout. How would the shape of the strategy payout change, if at all, if you used put options instead of calls? (10 points) 2. The spot price of silver is currently $1,350 per ounce. The forward price for delivery in one year is $1,460 per ounce. An arbitrageur can borrow money at 4% per annum. Is the forward price too high or low? Are there arbitrage opportunities? What strategy can an arbitrageur use to earn riskless profits? Be very precise in outlining the steps. Assume that the cost of storing silver is zero and that silver provides no income. (10 points) 3. Your company has a portfolio of stocks that is currently worth $150 million. The beta of the portfolio is 1.3. The company would like to use CME futures on the S&P 500 to immune the portfolio from systematic risk. The index is currently 1,200, and each contract is on $250 times the index. What position (long/short and the number of contracts) should the company take in the futures market? How would the strategy change, if instead, the company decided to increase its exposure to systematic risk and change the beta to 1.9? (10 points) 4. You are investing in an options strategy that involves buying a call option with a strike price of $30, selling two call options with a strike price of $35, and buying another call option with a strike price of $40. Use an excel spreadsheet to figure out what the resultant strategy "payout" looks like. Hint: Use stock price range between $20 and $50 with increments of $2.5 to generate the payout. How would the shape of the strategy payout change, if at all, if you used put options instead of calls? (10 points)
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