Financial Derivatives and Arbitrage Opportunities: An InDepth Analysis
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Financial Derivatives and Arbitrage Opportunities: An InDepth Analysis
Exercises 6, 7, 8, 11, 13, and 18.
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Please, use the full computing power of Excel.
Questions
costless. Suppose also that the term structure is flat with a continuously compounded
rate of interest of 6% for all maturities.
(a) Calculate the forward price of gold for delivery in three months.
(b) Now suppose it costs $1 per oz per month to store gold (payable monthly in advance).
What is the new forward price?
(c) Assume storage costs are as in part (b). If the forward price is given to be $1,805
per oz, explain whether there is an arbitrage opportunity and how to exploit it.
of interest for all maturities is 12%. The current price of the stock is $90.
(a) Calculate the arbitragefree price of (i) a threemonth forward contract on the stock
and (ii) a sixmonth forward contract on the stock.
(b) Suppose the sixmonth forward contract is quoted at 100. Identify the arbitrage
opportunities, if any, that exist, and explain how to exploit them.
The twomonth interest rate is 5% and the threemonth interest rate is 6%, both in
continuously compounded terms.
(a) What is the arbitragefree threemonth forward price for the bond?
(b) Suppose the forward price is given to be $97. Identify if there is an arbitrage opportunity
and, if so, how to exploit it.
The delivery price agreed to was $55. Today, the stock is trading at $45. Suppose the
threemonth interest rate is 4.80% in continuously compounded terms.
(a) Assuming the stock is not expected to pay any dividends over the next three months,
what is the current forward price of the stock?
(b) What is the value of the contract held by the investor?
(c) Suppose the stock is expected to pay a dividend of $2 in one month, and the one month
rate of interest is 4.70%. What are the current forward price and the value of
the contract held by the investor?
dividend of $0.50 in two months’ time. No other payouts are expected on the stock over
the next three months. Assume interest rates are constant at 6% for all maturities. You
enter into a long position to buy 10,000 shares of stock in three months’ time.
(a) What is the arbitragefree price of the threemonth forward contract?
(b) After one month, the stock is trading at $23.50. What is the markedtomarket value
of your contract?
(c) Now suppose that at this point, the company unexpectedly announces that dividends
will be $1.00 per share due to largerthanexpected earnings. Buoyed by the good
news, the share price jumps up to $24.50. What is now the markedtomarket value
of your position?
The spot price of copper is $3.87 per lb, and the forward price for delivery in three
months is $3.94 per lb. Suppose you can borrow and lend for three months at an interest
rate of 6% (in annualized and continuously compounded terms). Assume you have no
copper but can borrow it to short it if you wish.
(a) First, suppose there are no holding costs (i.e., no storage costs, no holding benefits).
Is there an arbitrage opportunity for you given these prices? If so, provide details of
the cash flows. If not, explain why not.
(b) Suppose now that the cost of storing copper for three months is $0.03 per lb, payable
in advance. (This is a threemonth cost, not a permonth cost.) How would your
answer to (a) change? (Note that storage costs are asymmetric: you have to pay
storage costs if you are long copper, but you do not receive the storage costs if you
short copper.)
Financial Derivatives and Arbitrage Opportunities: An InDepth Analysis
RUBRIC 

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Introduction
4541 points The background and significance of the problem and a clear statement of the research purpose is provided. The search history is mentioned. 
Literature Support 9184 points The background and significance of the problem and a clear statement of the research purpose is provided. The search history is mentioned. 
Methodology 5853 points Content is wellorganized with headings for each slide and bulleted lists to group related material as needed. Use of font, color, graphics, effects, etc. to enhance readability and presentation content is excellent. Length requirements of 10 slides/pages or less is met. 

Average Score 5085% 
4038 points More depth/detail for the background and significance is needed, or the research detail is not clear. No search history information is provided. 
8376 points Review of relevant theoretical literature is evident, but there is little integration of studies into concepts related to problem. Review is partially focused and organized. Supporting and opposing research are included. Summary of information presented is included. Conclusion may not contain a biblical integration. 
5249 points Content is somewhat organized, but no structure is apparent. The use of font, color, graphics, effects, etc. is occasionally detracting to the presentation content. Length requirements may not be met. 

Poor Quality 045% 
371 points The background and/or significance are missing. No search history information is provided. 
751 points Review of relevant theoretical literature is evident, but there is no integration of studies into concepts related to problem. Review is partially focused and organized. Supporting and opposing research are not included in the summary of information presented. Conclusion does not contain a biblical integration. 
481 points There is no clear or logical organizational structure. No logical sequence is apparent. The use of font, color, graphics, effects etc. is often detracting to the presentation content. Length requirements may not be met 

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