Take two forwards contracts with delivery price F. and K. a) What is the cash flow...
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Take two forwards contracts with delivery price F. and K. a) What is the cash flow difference between those two contracts at time T? b) What is the NPV of this difference at t=0? c) Given that the value of the forward (with delivery price Fo) at t=0 is 0, what is the value of the forward contract with delivery price K at t=0 ? Ex2: Assume that the size of the forward contract is 1000 British pounds for US dollars a) What is the value of a 1000 £ investment at time T if, at time t=0, this investment is invested at a risk free rate r, and if (also at t-0) one sells a long forward contract with price Fo? b) What is the value of a 1000 £ investment at time T if this investment is converted in S in the spot market (at So) at t=0 and invested at a rate r? c) Given that those two strategies must give the same result in the absence of arbitrage opportunities, find the price of the futures contract Fo. d) Explain why a foreign currency can be treated as an asset providing a known yield. e) Ex3: It is January and a company knows that it will need to purchase 2,000 barrels of crude oil in November. The spot price is $50 per barrel and the interest rate is 1%. Oil futures contract are traded for November and the contract size is 1,000 barrels. The initial margin requirement is $6,000/contract. a) What is the effective price paid in November if the company buys futures contracts today? b) Tomorrow, the futures price is $51 what is the new margin balance? c) Assume now that only December futures contracts are available. In November, the spot and futures prices are $55 and $54 respectively. What is the effective price paid by the company? Take two forwards contracts with delivery price F. and K. a) What is the cash flow difference between those two contracts at time T? b) What is the NPV of this difference at t=0? c) Given that the value of the forward (with delivery price Fo) at t=0 is 0, what is the value of the forward contract with delivery price K at t=0 ? Ex2: Assume that the size of the forward contract is 1000 British pounds for US dollars a) What is the value of a 1000 £ investment at time T if, at time t=0, this investment is invested at a risk free rate r, and if (also at t-0) one sells a long forward contract with price Fo? b) What is the value of a 1000 £ investment at time T if this investment is converted in S in the spot market (at So) at t=0 and invested at a rate r? c) Given that those two strategies must give the same result in the absence of arbitrage opportunities, find the price of the futures contract Fo. d) Explain why a foreign currency can be treated as an asset providing a known yield. e) Ex3: It is January and a company knows that it will need to purchase 2,000 barrels of crude oil in November. The spot price is $50 per barrel and the interest rate is 1%. Oil futures contract are traded for November and the contract size is 1,000 barrels. The initial margin requirement is $6,000/contract. a) What is the effective price paid in November if the company buys futures contracts today? b) Tomorrow, the futures price is $51 what is the new margin balance? c) Assume now that only December futures contracts are available. In November, the spot and futures prices are $55 and $54 respectively. What is the effective price paid by the company?
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Exercise 1 Assuming that delivery price F refers to the forward contract with delivery price F and delivery price K refers to the forward contract wit... View the full answer
Related Book For
Income Tax Fundamentals 2013
ISBN: 9781285586618
31st Edition
Authors: Gerald E. Whittenburg, Martha Altus Buller, Steven L Gill
Posted Date:
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