## (Solved) Schulich School of Business York University Derivatives FINE 6800, Section G (MBA) Winter 2017 Instructor: Dr. Melanie Cao (Due: March 8, 2017)

Suppose that the term structure is described in the following table:

maturity 6-month 12-month 18-month 24-monthyield 5% 5.2% 5.4% 5.6%Assume that 6-month LIBOR rate is 5.1%.

ï‚· What is the market fixed rate (annualized, semiannual compounded) for a 2-year interest rate swap with semiannual payments?

ï‚· XYZ entered into such a swap as the fixed-rate payer, with a notional amountof \$10 million. Two months later, suppose that the yield curve becomes flat at5% for all maturities and the 6-month LIBOR rate is 5.05%. What is the valueof the swap to XYZ?

ï‚· If the counterpart defaults now, what is the loss to XYZ?

Schulich School of Business York University Derivatives
FINE 6800, Section G (MBA) Winter 2017 Instructor: Dr. Melanie Cao
(Due: March 8, 2017)
Assignment 2: 5 points
1. Suppose that the term structure is described in the following table:
maturity 6-month 12-month 18-month 24-month yield 5% 5.2% 5.4% 5.6% Assume that 6-month LIBOR rate is 5.1%. What is the market fixed rate (annualized, semiannual compounded) for a 2year interest rate swap with semiannual payments? XYZ entered into such a swap as the fixed-rate payer, with a notional amount
of \$10 million. Two months later, suppose that the yield curve becomes flat at
5% for all maturities and the 6-month LIBOR rate is 5.05%. What is the value
of the swap to XYZ? If the counterpart defaults now, what is the loss to XYZ? 2.
Using the Bootstrap method to determine the yield curve with the following
information:
Annual Coupon
0.00%
4.00%
4.50%
5.00% Maturity
(years)
1
2
3
4 Bond
Prices
\$959.20
\$965.15
\$946.30
\$935.95 3.
A. B. Three European call options on the same stock with the same
maturity are trading at c1 = \$1.0, c2 = \$1.5, and c3 = \$2.0. The
corresponding exercise prices are K1 = 20, K2 = 19, K3 = 16. Is
there an arbitrage opportunity? If so, how can you take advantage
of it (use one contract in your calculation)? Two European put options written on the same stock with a
maturity of one year are trading at p1 = \$1.1, p2 = \$0.1 The
corresponding exercise prices are K1 = \$20 and K2 = \$19. The
riskfree interest rate is 1% per annual. Is there an arbitrage
opportunity? If so, how can you take advantage of it (use one
Show the Put-Call Parity Conditions for European Options whose underlying
asset pays continuous dividends. That is,
c p Se qT Ke rT where q is the continuous dividend yield. 5.
The spot price for Intel stock is \$90. There are calls and puts traded on Intel stock
with a strike price \$90 and maturity 6 months. The call price is \$2.25 and the put is \$0.99.
The riskfree rate (continuously compounded) is 5%. Is any arbitrage opportunity? If so,

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