Questions from Business Statistics

Q: Prove the result in equation (11.7). (Hint

Prove the result in equation (11.7). (Hint: For the first part of the relationship, consider (a) a portfolio consisting of a European call plus an amount of cash equal to K, and (b) a portfolio consis...

Q: A bank quotes an interest rate of 7% per annum with

A bank quotes an interest rate of 7% per annum with quarterly compounding. What is the equivalent rate with (a) continuous compounding and (b) annual compounding?

Q: ‘‘Buying a put option on a stock when the stock is

‘‘Buying a put option on a stock when the stock is owned is a form of insurance.’’ Explain this statement.

Q: A deposit account pays 4% per annum with continuous compounding,

A deposit account pays 4% per annum with continuous compounding, but interest is actually paid quarterly. How much interest will be paid each quarter on a $10,000 deposit?

Q: Suppose that 6-month, 12-month, 18-

Suppose that 6-month, 12-month, 18-month, 24-month, and 30-month zero rates are, respectively, 4%, 4.2%, 4.4%, 4.6%, and 4.8% per annum, with continuous compounding. Estimate the cash price of a bond...

Q: Suppose that risk-free zero interest rates with continuous compounding are

Suppose that risk-free zero interest rates with continuous compounding are as follows: Calculate forward interest rates for the second, third, fourth, and fifth years.

Q: Use the risk-free rates in Problem 4.14 to

Use the risk-free rates in Problem 4.14 to value an FRA where you will pay 5% (annually compounded) and receive LIBOR for the third year on $1 million. The forward LIBOR rate (annually compounded) for...

Q: Explain how LIBOR is determined.

Explain how LIBOR is determined.

Q: ‘‘An interest rate swap where 6-month LIBOR is exchanged

‘‘An interest rate swap where 6-month LIBOR is exchanged for a fixed rate of 5% on a principal of $100 million for 5 years involves a known cash flow and a portfolio of nine FRAs.’’ Explain this state...

Q: The 6-month and 1-year zero rates are both

The 6-month and 1-year zero rates are both 5% per annum. For a bond that has a life of 18 months and pays a coupon of 4% per annum (with semiannual payments and one having just been made), the yield i...