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1. If a stock price is 80 and the risk free rate is 2% (continuously compounded), suppose the volatility is zero, what is the price of a 1-year call struck? How to hedge the call?

2. An annuity makes 5 equal annual payments of $2,000. The first payment begins in exactly 10 years. If the relevant discount (interest) rate is 10%, what is the present value (today) of the annuity?

3. A security is currently selling for $8,000 and promises to pay $1,000 annually for the next 9 years, and $1,500 annually in the 3 years thereafter with all payments occurring at the end of each year. If your required rate of return is 7% p.a., should you buy this security? (Show your work)

Financial Management, Finance

  • Category:- Financial Management
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