Option Quiz 2 Qn21

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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?


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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

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Re: Option Quiz 2 Qn21

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

Perfect Answer Vandana 8-)

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