Given the following information, compute the spot rates, the 1-year forward rate, the par rates, and...

    

Transcribed Image Text:

Given the following information, compute the spot rates, the 1-year forward rate, the par rates, and YTM. (Coupons, if any, are paid once a year). 15 marks Maturity Annual Bond (years) Coupon Price Rate 1 2 0 3% 98 100 Spot Rate (continuous 1-yr Forward Rate compounding) (continuous compounding) Par Rate YTM (annual (annual compounding) compounding) (b) Given the following information (the call and put have the same strike price, maturity and underlying asset): So K T (year) T European call European put $10 $5 1 0% $6 $2 Is there any arbitrage opportunity? If yes, explain how arbitrage can be carried out. 5 marks Given the following information, compute the spot rates, the 1-year forward rate, the par rates, and YTM. (Coupons, if any, are paid once a year). 15 marks Maturity Annual Bond (years) Coupon Price Rate 1 2 0 3% 98 100 Spot Rate (continuous 1-yr Forward Rate compounding) (continuous compounding) Par Rate YTM (annual (annual compounding) compounding) (b) Given the following information (the call and put have the same strike price, maturity and underlying asset): So K T (year) T European call European put $10 $5 1 0% $6 $2 Is there any arbitrage opportunity? If yes, explain how arbitrage can be carried out. 5 marks

Answer rating: 100% (QA)

SOLUTION a Spot Rate The spot rate is the current market price of the bond Since the coupon rate is 0 the spot rate is simply the face value of the bond which is 100 1year Forward Rate The 1year forwa... View the full answer