Cornell University

AEM 420, Wang, Fall 04

HW1, Forwards and Swaps
Due Date: 9/14/04

1. Assume the appropriate discount rates for 3, 6, 9 and 12 months are the same as the LIBOR
rates given. A hypothetical stock, XYZ, had a price of $125 on 1/19/04 and pays dividends as
shown below:

Date Dividend Amount

3/15/04 $1.5
6/15/04 $2
9/15/04 $2
12/15/04 $2

LIBOR (continuously compounded)

3mo 1.7700%
6mo 1.8813%
9mo 2.0538%
12mo 2.2875%

(a) Determine the price to enter a long one-year forward position in XYZ.

(b) Calculate the one-year forward price for delivery of XYZ, as of 1/19/04.

(c) Plot the payoff of a long position in a one-year forward contract at maturity.

(d) How would the 1-year forward price of XYZ on 1/19/04 have changed if the 3 month,
6 month, 9 month and 12 month LIBOR rates all suddenly increased by 1% while the
stock price did not move?

(e) Another hypothetical stock, PQR, had a price of $100 on 1/19/04 and pays no
dividends. What is the price to enter a 1-year swap that receives the total return on XYZ
and pays the total return on PQR?

2. Go to the website http://finance.yahoo.com, enter Ebay symbol (EBAY), and click on the
“historical prices” link. Get the closing price on Monday, 1/20/04. Assume Ebay will never pay
dividends. Use the information to calculate the price of a one-year forward contract for Ebay,
assuming the riskfree interest rates in Question 1.