FINA0301Derivatives

Dr.HuiyanQiu

Short Answers to the questions in the after-class exercise: Overview and Preparation

Question 1

a) The equivalent rate with annual compounding is 5.06%. b) The equivalent rate with monthly compounding is 4.95%. c) The equivalent rate with continuous compounding is 4.94%.

Question 2

a) b) c) d)

With annual compounding, the percentage return is 10% per annum. With semi-annual compounding, the percentage return is 9.76% per annum. With monthly compounding, the percentage return is 9.57% per annum. With continuous compounding, the percentage return is 9.53% per annum.

Question 3

a) There would be 3,996 1.087 = 6,848.44 in the account, if you left the money there until your 25th birthday. b) There would be 3,996 1.0847 = 148,779.12 in the account, if you left the money there until your 65th birthday. c) Your grandfather originally put: 3,996 = x 1.0818 x = 100 in the account.

Question 4

Your investment worth HK$50 100 e0.015 = HK$5,256.36 after 5 years.

Question 5

With continuous compounding, the present value to deposit today is: 15,000 = x e0.083 x = 11,799.42

FINA0301Derivatives
Question 6

Dr.HuiyanQiu

a) Investors could borrow money from Bank One and deposit in Bank Enn to exploit the interest rate differences. b) Bank One would experience a surge in the demand for loans, while Bank Enn would receive a surge in deposit. c) Bank One interest rate would rise, while Bank Enn interest rate would fall. The two interest rates offered by banks would approach to the same number.

Question 7

Applying the Forward pricing formula, the 6-month arbitrage-free forward price is $35e0.025 = $35.89.

Question 8

a) Price per share of the ETF is $28 2 + $40 + $14 3 = $138 in a normal market. b) You would buy ETF and short stocks correspondingly, if the ETF currently trades for $120. c) You would sell ETF and buy stocks correspondingly, if the ETF currently trades for $150.

Question 9

a) The payoff of a portfolio consisting of one share of security A and one share of security B is 600. b) The market price of such portfolio is $577.54 and the expected return is 3.89%. c) The no-arbitrage price of security C is $1,039.08.