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Design an arbitrage profit taking strategy

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Reference no: EM13495194

Q1: (Foward Pricing - use continuous compounding)

A non-dividend paying stock is currently traded at $65 per share. What should be an equilibrium forward price on the stock for delivery in 9 months? The risk-free interest rate (with continuous compounding) is 6% per an

Q2: (Foward Valuation)

In August, you took a long position on a 6-month forward contract on a non-dividend-paying stock when the stock price was $45 and the risk-free interest rate (with discrete compounding) is 4% per annum. It is now September, exacly one month later. The current stock price is $50 and the interest rate is 6%. Estimate the value of your position now. Assume the forward contracts are priced such that no arbitrage profit making opportunities exist.

Q3 (Arbitrage) On May 9, 2012 , Apple Inc. (AAPL) stock was traded at $568.50 ( spot price). The mean target price by analysts was $707.09. On May 9th, 2012, a forward dealer was willing to sell AAPL stocks on a forward contract maturing in 3 months (8/9/2012) at $640.25 (3-mo forward price) and buy at 632.25. You can borrow or lend money with a 3-month maturity at 4% /year.

a) The market is not in equilibrium. Explain/Prove why the market is not in equilibrium.

b) Design an arbitrage profit taking strategy and show the amount of the profit your strategy will produce.

Q4 (Options) On January 12, 2012, you bought a call option and a put option on Apple stock (AAPL) with a strike price of $450. The option premium you paid was $40 for the call and $5 for the put. The option expired in March 2012. On expiration date, the AAPL's spot price was $580.
a) What is the payoff from the call option?
b) What is the profit or loss from the call option
c) What is the payoff from the put option?
d) What is the profit or loss from the put option?

Reference no: EM13495194

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