EF4420 Derivative Analysis and Advanced Investment Strategies - Semester B 2016/2017

EF4420 Derivative Analysis and Advanced Investment Strategies

Problem Set 4

This problem set is to be turned in by Wednesday, March 1st 11:00 pm. Please present your work using MS
Word or PDF and submit online on Canvas. You may use Excel for calculation but the final solution should
be presented in MS Word or PDF.

1. Forward on Stock Index

An index is 1,200. The three-month risk-free rate is 3% per annum and the dividend yield over the next
three months is 1.2% per annum. Consider a three-month forward on the index. What is the forward price
of the contract?

2. Forward on Foreign Currency

The two-month interest rates in Switzerland and the United States are 2% and 5% per annum, respectively,
with continuous compounding. The spot price of the Swiss franc is $0.8000. The forward price for a contract
deliverable in two months is $0.8100. What arbitrage opportunity does this create?

1 Instructor: Yongjin Kim

EF4420 Derivative Analysis and Advanced Investment Strategies - Semester B 2016/2017

3. Valuation of Forward
Suppose that in the past you entered a long position of a forward contract on a stock with the forward price
of $70 and currently hold the position. The contract will mature 3 years from now. You want to close the
existing position right now, earlier than the maturity, and the counterparty agrees to do so. To close now,
how much do you need to pay to or receive from the counterparty? The current stock price is $60 and the
risk-free rate is 5%.

2 Instructor: Yongjin Kim