91Ó°ÊÓ

A \(\$ 50\) stock pays an \(8 \%\) continuous dividend. The continuously compounded risk-free rate is \(6 \%\) a. What is the price of a prepaid forward contract that expires 1 year from today? b. What is the price of a forward contract that expires at the same time?

Suppose you are a market-maker in S\&ER index forward contracts. The S\&R index spot price is 1100 , the risk-free rate is \(5 \%\), and the dividend yield on the index is 0 a. What is the no-arbitrage forward price for delivery in 9 months? b. Suppose a customer wishes to enter a short index futures position. If you take the opposite position, demonstrate how you would hedge your resulting long position using the index and borrowing or lending. c. Suppose a customer wishes to enter a long index futures position. If you take the opposite position, demonstrate how you would hedge your resulting short position using the index and borrowing or lending.

The \(S \& R\) index spot price is 1100 , the risk-free rate is \(5 \%,\) and the continuous dividend yield on the index is \(2 \%\) a. Suppose you observe a 6 -month forward price of \(1120 .\) What arbitrage would you undertake? b. Suppose you observe a 6 -month forward price of 1110 . What arbitrage would you undertake?

Suppose the current exchange rate between Germany and Japan is \(0.02 € / ¥\). The euro-denominated annual continuously compounded risk-free rate is \(4 \%\) and the yen-denominated annual continuously compounded risk-free rate is \(1 \%\). What are the 6 -month euro/yen and yen/euro forward prices?