• Compute Δ for the following 12-month call option on a non-dividend paying stock. The stock is selling for 20. The strike price is 20. The possible prices of the underlying stock at the end of 12 months are 35 and 12. The continuously compounded interest rate is 5%. Using the binomial model, which of the following is closest to Δ?
o 0
o .20
o .40
o .60
o .80
• Which is closest to the fair price for the option in the previous question?
o 1
o 3
o 5
o 7
o 9
• Assume the continuously compounded interest rate is 2%. XYZ corporation stock does not pay dividends and is currently trading at $30. You enter into a forward contract to buy XYZ stock in one year. What is closest to the fair forward price for this contract (i.e., what is the amount you should pay in one year in exchange for XYZ)?
o $29
o $29.50
o $30
o $30.50
o $31
• Suppose immediately after signing the agreement in the previous question, the continuously compounded interest rate jumps to 20%, and the stock price falls to $20. You wish to terminate your agreement. What is closest to a fair payment from your counterparty to you to terminate the agreement? (A negative number would reflect a payment from you to the counterparty.)
o -$6
o -$2
o $0
o $2
o $6
• You have a bond that pays a $3 coupon in 1 year and a $3 coupon in two years and a $3 coupon in three years. It matures in three years with principal repayment of $100 (paid at the same time as the final coupon). Suppose 1-year, 2-year, and 3-year zero coupon bond prices are 0.97, 0.93, and 0.88, respectively. Which is closest to the fair market price of the bond that you have?
o $96.00
o $98.00
o $100.00
o $102.00
o $104.00
• You would like would like to swap the uneven payments (note that the payments are $3 in year 1 and year 2, but $103 in year 3) associated with the bond described in (5) for payments of equal amounts in 1 year, in 2 years, and in 3 years. Assuming you can find a swap counterparty who offers you a fair deal (and that interest rates are unchanged), what is closest to the swap rate amounts will you receive in each year as a result of the swap?
o $30.00
o $32.00
o $34.00
o $36.00
o $38.00
• The price of a 1-year zero coupon bond is 0.99. The price of a 2-year zero coupon bond is 0.97. The price of a 3-year zero coupon bond is 0.92. The price of a 4-year zero coupon bond is 0.88. You are a borrower who anticipates needing to borrow $100,000 for one year at the end of year 2 and would like to guarantee the rate on your upcoming loan (i.e., after 2 years you will need a $100,000 loan which will last for one year). Which is closest to the interest rate you will be able to guarantee if there are no transactions costs and you get a fair deal in the interest rate forward market?
o 1%
o 2%
o 3%
o 4%
o 5%