a) A three-month forward contract exists on a zero-coupon corporate bond with a current price per 100
Question:
a) A three-month forward contract exists on a zero-coupon corporate bond with a current price per £100 nominal of £42.60. The yield available on three-month government securities is 6% pa effective. Calculate the forward price.
b) Portfolio B contains a European put option and a share. Compare this with the alternative of cash, currently worth ke-r(T-t)- . At time T portfolio B will be worth at least as much as the cash alternative. Why must Portfolio B be worth at least as much as the cash alternative?
What is the lower bound for a 3-month European put option on Share X if the share price is 95, the exercise price 100, and the risk-free rate 12% pa?
c) Explain why the put-call parity relationship above does not hold in the case of:
- American options on non-dividend-paying shares.
- European options on dividend-paying shares.
Company X issues 3-month European call options on its own shares with a strike price of 120p. They are currently priced at 30 pence per share. The current share price is 123p and the current force of interest is δ = 6% pa .
Foundations of Financial Management
ISBN: 978-1259024979
10th Canadian edition
Authors: Stanley Block, Geoffrey Hirt, Bartley Danielsen, Doug Short, Michael Perretta