Question;1. The yield to maturity (YTM) on 1-year zero-coupon bonds is 5% and the YTM on 2-yearzeros is 6%. The yield to maturity on 2-year-maturity coupon bonds with coupon rates of 12%(payable annually) is 5.8%. Is there an arbitrage opportunity? If yes, what is the arbitrageprofit?2. Suppose the yield curve is flat at 5% and you are holding a bond portfolio consisting of a 2year annual coupon bond with 5% coupon rate and a 5-year zero coupon bond, both bondswith face value of $1000.a. What is the duration of the bond portfolio?b. Describe the zero coupon bond that you can issue against the bond portfolio whichwould minimize your exposure to interest rate risk.c. With reference to b., describe briefly what would happen to the net value of yourposition if the yield curve were to shift momentarily.3. The price of a non-dividend paying stock is currently $10. It is known that at the end of themonth, it will be either $7 or $12. The one-month periodic risk-free rate of interest is 0.5%.a. Compute the value of a one-month at-the-money European put option.b. What is the payoff at the end of the month for a protective put portfolio?c. Assuming that the relevant put options are not traded, construct a syntheticprotective put portfolio (of the stock and the risk free security) with payoff at the end ofthe month identical to that of the protective put portfolio in Part b.4. Consider the futures contract written on the S&P500 index and maturing in 6 months. Theeffective interest rate is 3% per 6-month period, and the future value of dividends expected tobe paid over the next 6 months is $15. The current index level is 1,425. Assume that you canshort sell the S&P index.a. Suppose the expected rate of return on the market is 6% per 6-month period. What isthe expected level of the index in 6 months?b. What is the theoretical no-arbitrage price for a 6-month futures contract on the S&P500 stock index?c. Suppose the futures price is 1,422. Is there an arbitrage opportunity here? If so, howwould you exploit it?
Paper#48267 | Written in 18-Jul-2015Price : $21