| Country : | Australia |
|---|
Assignment Task -
Question 1
Suppose that the current price of wheat is $5 per bale. The forward price, for purchase of wheat in three months’ time, is $5.80 per bale. Storage costs for wheat are $0.50 per bale for 3 months payable after 3 months. Assume j12 = 12% p.a. and the forward contract is on 1,000 bales of wheat.
By using two carefully labelled cash flow diagrams in your answer setting out the cash flows associated with the forward contract and the replicating portfolio, explain how you can determine the fair forward price for this forward contract. Base your answer on the arbitrage pricing principle, and give your answer in dollars rounded to six decimal places.
List and explain all the steps that a person needs to take in order to make an arbitrage profit from buying or selling such a forward contract on 1,000 bales of wheat, including any associated borrowing or lending. Make sure you outline all that needs to happen on all relevant dates, as well as today. Calculate the arbitrage profit and give your answer in dollars rounded to three decimal places.
Question2
6 month European call option on a share in ABC Ltd has an exercise price of $20. The current share price for ABC Ltd is $18.50. After 6 months, the share price will either rise to $22 or fall to $14. Assume that j1 = 5% p.a.
Consider a strategy today where you buy h shares of ABC Ltd and borrow B dollars. Showing your working, find the values of h and B that will replicate the payoff from the 6 month European call option on ABC Ltd shares described above regardless of whether the share price rises or falls. Express has a fraction and quote B rounded to 5 decimal places. Illustrate this model in a carefully labelled contingent cash flow diagram.
Using your result from part (a), calculate the no-arbitrage option price. Give your answer in dollars rounded to two decimal places.
This Accounting Assignment has been solved by our Accounting experts at onlineassignmentbank. Our Assignment Writing Experts are efficient to provide a fresh solution to this question. We are serving more than 10000+Students in Australia, UK & US by helping them to score HD in their academics. Our Experts are well trained to follow all marking rubrics & referencing style.
Be it a used or new solution, the quality of the work submitted by our assignment experts remains unhampered. You may continue to expect the same or even better quality with the used and new assignment solution files respectively. There’s one thing to be noticed that you could choose one between the two and acquire an HD either way. You could choose a new assignment solution file to get yourself an exclusive, plagiarism (with free Turnitin file), expert quality assignment or order an old solution file that was considered worthy of the highest distinction
