c&d

[3] can be hedged using a forward contract and an option. c) (i) An investor has just taken a long position in a 9-month forward contract on a coupon-bearing bond that will mature 9 months from today. The bond is expected to pay a coupon of 30 in 3 months and another coupon of 30 in 6 months. The bond price is 550 , and the risk-free rate of interest is 5% per annum with continuous compounding for all maturities. Determine the strike price, the forward price and the initial value of the forward contract. [3] (ii) Four months later, the price of the bond is 600 and the risk-free rates of interest are 3% for maturity 2 months and 3.8% for maturity 5 months. What are the strike price, the forward price and the value of the long position in the forward contract? [3] (iii) If the forward price for that contract computed in 2(e)ii was 582 , what arbitrage opportunities does this create? How much will you gain with that strategy? [4] (d) (i) Give the definition of derivative instrument and explain what is a future contract. [2] (ii) The spot price of silver is $700 per ounce. The storage costs are $100 per ounce per year with the payment being made at the end of the year. As- suming that interest rates are 3.5% per annum for all maturities, calculate the futures price per ounce of silver for delivery in 1 year. [4] (iii) You are a jewellery maker and you enter into futures contracts on silver. Take all the data equal to 2(d)ii. Compute a bound for the future price and the convenience yield in case Fo = $810