0% found this document useful (0 votes)
224 views2 pages

Practice Sheet 732

The document contains practice problems related to financial mathematics. There are 17 multi-part problems covering topics like compound interest, arbitrage, forward pricing, and margin requirements for futures contracts. The problems require calculating present and future values, identifying arbitrage opportunities, and determining forward and futures prices.

Uploaded by

Archana Meena
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PDF, TXT or read online on Scribd
0% found this document useful (0 votes)
224 views2 pages

Practice Sheet 732

The document contains practice problems related to financial mathematics. There are 17 multi-part problems covering topics like compound interest, arbitrage, forward pricing, and margin requirements for futures contracts. The problems require calculating present and future values, identifying arbitrage opportunities, and determining forward and futures prices.

Uploaded by

Archana Meena
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PDF, TXT or read online on Scribd
You are on page 1/ 2

MTL732: Financial Mathematics, Practice Sheet 1

1. Guptaji is planning ahead for his sons education. He is eight now and will start college in 10 years. How
much will Guptaji have to set aside at the end of each year to have Rs 65000 in 10 years if the annual interest
rate is 7%?

2. Raj’s uncle is going to give him Rs 250 a month for the next two years starting today. If Raj deposits every
payment in an account paying an annual interest rate of 6% compounded monthly, how much will he have
at the end of three years?
3. A company is considering its options for a machine to use in production. At a cost of 470 the company can
make some small repairs on current machine which will make it last for 2 more years. At a higher cost of
900, the company can make more extensive repairs on current machine making it last for 4 more years. A
new machine costs 3000 and will last for 8 years. The company is facing an interest rate of 10%. Advice the
best action.

4. You plan to buy a mobile that cost Rs 25700. You made a down payment Rs 4000. The remaining cost
is financed over a period of 3 years. You will repay the loan by making equal monthly installments. The
interest quoted is 8% per annum with monthly compounding. What is your monthly payment plan when the
payments are to be made at the end of the month.

5. You are valuing an investment that will pay you Rs 12000 the first year, Rs 14000 the second year, Rs 17000
the third year, Rs 19000 the fourth year, Rs 23000 the fifth year, and Rs 29000 the sixth year (all payments
are at the end of each year). What it the value of the investment to you now is the appropriate annual
discount rate is 10%?

6. Spot an arbitrage opportunity in the following situation:


Suppose a dealer A offers to buy a British pounds in an year from now at a rate Rs 79 to a pound, while
dealer B would sell British pounds immediately at a rate Rs 80 to a pound. Suppose that a rupee can be
borrowed at an annual rate of 4% and a British pound can be invested in a bank at 6% annual interest.

7. You are given these exchange rate in a bank (buying(bid)-selling(ask)) data:


JPY/EUR 139.3449 139.4782
JPY/AUD 92.5606 92.6883
AUD/EUR 1.4854 1.4966
You start with AUD 1000. Is there an arbitrage opportunity? If so, what trades do you make, and what
profit will you earn? (Hint: trade AUD to EURO, EURO to JPY, JPY to AUD)

8. Suppose that you are given the following information about the CAD (Canadian dollar) and the GBP:
The spot rate is CAD/GBP 1.7791 (i.e., CAD 1.7791 = GBP 1.00) The 1-year risk-free GBP rate is 2% The
1-year risk-free CAD rate is 2.4% Find if this sitaution has an arbitrage opportunity.

9. Find the arbitrage opportunity: at a time, a stock is trading both in New York stock exchange and London
stock exchange at prices USD 154 and BP 100, respectively, and the exchange rate is USD 1.55 per BP.

10. The price of gold currently is Rs 25000 per 10 gram. The forward price of delivery in one year is Rs 25500.
If you can borrow money at 10% compounded annually, then can you get an arbitrage profit? If yes, then
explain how?
11. Let A(0) = Rs100; A(1) = Rs115 and S(0) = 35. Can the forward price of the stock be Rs 41 at the delivery
time 1 unit, assuming no arbitrage principle?
12. The 2 months interest rate in Switzerland and USA are 3% and 8% per annum respectively with continuous
compounding. The spot price of a Swiss franc is USD 0.65. The forward price for a contract deliverable in 2
months is USD 0.66. Can an arbitrage opportunity be created? If so, how?

13. Suppose that the price of a stock is Rs 45 at the beginning of the year, the risk-free annual rate is 6% and
Rs 2 dividend will be paid after half a year. Then for a long forward position with delivery in one year, find
the value of the contract after nine months if the stock price at that time turns out to be Rs 50.
14. Stock XYZ has a current price of 100. The forward price for delivery of this stock in 1 year is 110. Unless
otherwise indicated, the stock pays no dividends and the annual effective risk-free interest rate is 10%.
Determine which of the following statements is FALSE.
(A) The time-1 profit diagram and the time-1 payoff diagram for long positions in this forward contract are
identical.

1
(B) The time-1 profit for a long position in this forward contract is exactly opposite to the time-1 profit for
the corresponding short forward position.
(C) There is no comparative advantage to investing in the stock versus investing in the forward contract.
(D) If the 10% interest rate was continuously compounded instead of annual effective, then it would be more
beneficial to invest in the stock, rather than the forward contract.
(E) If there was a dividend of 3.00 paid 6 months from now, then it would be more beneficial to invest in the
stock, rather than the forward contract.
15. The current price of a stock is 200, and the continuously compounded annual risk-free interest rate is 4%.
A dividend will be paid every quarter for the next 3 years, with the first dividend occurring 3 months from
now. The amount of the first dividend is 1.50, but each subsequent dividend will be 1% higher than the one
previously paid. Calculate the fair price of a 3-year forward contract on this stock.
16. Suppose the XYZ index is currently Rs 950 and initial margin 10%. You wish to enter into 10 XYZ futures
contracts. If continuous compounding rate is 5% on margin balance, and marking is done weekly, maintenance
margin is 80% of initial margin. What is the maximum futures price 1 week from today at which you will
receive a margin call?
17. A stock is expected to pay a dividend of Rs 1 per share in 2 months and 5 months. The stock price at
present is Rs 50 and risk free continuous compounding interest is 8% per annum. An investor has just taken
a short position in a 6-month forward contract on stock. What are the forward price and initial value of
forward contract. Three months later, the stock is at Rs 48 and no change in risk free interest rate. What
are the forward price and value of the short position in contract? (Hint: Convince yourself that the value of
a forward contract at t to the holder of the contract, is f0,t,T = St − F e−r(T −t) )

You might also like