Reference no: EM131346125
1. Assume that oil forward prices for 1 year, 2 years, and 3 years are $18, $19, and $20. the 1-year effective annual interest rate is 6.5%, the 2-year interest rate is 7.0%, and the 3-year interest rate is 7.5%.
a. what is the 3-year swap price?
b. what is the price of a 2-year swap beginning in one year? (that is, the ?rst swap settlement will be in 2 years and the second in 3 years.)
2 . You are the financial manager of a company and you are presented with this scenario: the exchange rate is 0.95 $/€, the euro-denominated continuously compounded interest rate is 4%, the dollar-denominated continuously compounded interest rate is 6%, and the price of a 1-year 0.93-strike European call on the euro is $0.0571. Calculate the price of a 0.93-strike European put.
3. Given the call and put prices below
strike
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55
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60
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65
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call premium
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20
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16
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11.50
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put premium
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9
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12.75
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16.45
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a. what are convexity violations for the call and put premiums?
b. what spread you would you use to effect arbitrage?
c. demonstrate that the spread position is an arbitrage.
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