Option Quiz 2 Qn21

d2syh
Good Student
Posts: 21
Joined: Fri Aug 17, 2012 3:27 pm

Option Quiz 2 Qn21

Postby d2syh » Tue Oct 30, 2012 12:04 pm

A European-style call spread consists of a long position in the 105 strike call and a short position in the 115 strike call both maturing in 18 months. The options are on a stock index with an annualized dividend yield of 1% per annum. The interest rates are 4% (annual compounding) for 1 year and 5% (annual compounding) for 2 years. Under these circumstances, what is the number nearest the maximum value of this position today?
Choose one answer.
a. 9.5
b. 10
c. 9.29
d. 9.4
The answer is: 9.5.

This is the answer yielded when 10/[(1.04) × (1 + 0.045/2).

How do we derive 0.045/2? And can you explain it?

Tags:

vandana.jain
Finance Junkie
Posts: 41
Joined: Tue Jul 24, 2012 4:56 pm

Re: Option Quiz 2 Qn21

Postby vandana.jain » Wed Oct 31, 2012 1:59 pm

can we say here that 5 is two year forward rate and we want to know two year spot rate....
so, 5=R2+R2-4*1/2-1=4.5

correct me if i m wrong

content.pristine
Finance Junkie
Posts: 356
Joined: Wed Apr 11, 2012 11:26 am

Re: Option Quiz 2 Qn21

Postby content.pristine » Wed Oct 31, 2012 2:47 pm

Perfect Answer Vandana 8-)


Return to “FRM Part I”



Disclaimer

Global Association of Risk Professionals, Inc. (GARP®) does not endorse, promote, review or warrant the accuracy of the products or services offered by EduPristine for FRM® related information, nor does it endorse any pass rates claimed by the provider. Further, GARP® is not responsible for any fees or costs paid by the user to EduPristine nor is GARP® responsible for any fees or costs of any person or entity providing any services to EduPristine Study Program. FRM®, GARP® and Global Association of Risk Professionals®, are trademarks owned by the Global Association of Risk Professionals, Inc

CFA Institute does not endorse, promote, or warrant the accuracy or quality of the products or services offered by EduPristine. CFA Institute, CFA®, Claritas® and Chartered Financial Analyst® are trademarks owned by CFA Institute.

Utmost care has been taken to ensure that there is no copyright violation or infringement in any of our content. Still, in case you feel that there is any copyright violation of any kind please send a mail to abuse@edupristine.com and we will rectify it.