There are two dates, Date 0 and Date 1. There are two assets, Asset 1 and...
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There are two dates, Date 0 and Date 1. There are two assets, Asset 1 and Asset 2. Let S denote the price of Asset n at Date t. There are no storage costs, dividends, etc. Here, we study a swap, which is similar to a forward, but rather than agreeing to the cash purchase of an asset in the future, you agree to exchange another asset for it. Specifically, here, as in a forward, you exchange nothing today and you get one unit of S¹ at Date 1. Except instead of paying in cash, you deliver f units of Asset 2. Here we find the "swap rate" f. 1. Keeping the Date-1 price of Asset 2 S² and the swap rate f fixed, draw the payoff diagram of the long position in the swap as a function of S 2. Write down the Date-1 payoff of the long position swap in terms of S₁, S², and f. [5 marks] 3. Write down a replicating portfolio for the long swap. [5 marks] There are two dates, Date 0 and Date 1. There are two assets, Asset 1 and Asset 2. Let S denote the price of Asset n at Date t. There are no storage costs, dividends, etc. Here, we study a swap, which is similar to a forward, but rather than agreeing to the cash purchase of an asset in the future, you agree to exchange another asset for it. Specifically, here, as in a forward, you exchange nothing today and you get one unit of S¹ at Date 1. Except instead of paying in cash, you deliver f units of Asset 2. Here we find the "swap rate" f. 1. Keeping the Date-1 price of Asset 2 S² and the swap rate f fixed, draw the payoff diagram of the long position in the swap as a function of S 2. Write down the Date-1 payoff of the long position swap in terms of S₁, S², and f. [5 marks] 3. Write down a replicating portfolio for the long swap. [5 marks]
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Related Book For
Microeconomics An Intuitive Approach with Calculus
ISBN: 978-0538453257
1st edition
Authors: Thomas Nechyba
Posted Date:
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