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Suppose that you enter into a six-month forward contract on a non-dividend-paying stock when the stock price is $30 and the risk-free interest rate (with continuous compounding) is 12% per annum. What is the forward price?

1

A stock index currently stands at 350. The risk-free interest rate is 8% per annum (with continuous compounding) and the dividend yield on the index is 4% per annum. What should the futures price for a four-month contract be?

2

The risk-free rate of interest is 7% per annum with continuous compounding, and the dividend yield on a stock index is 3.2% per annum. The current value of the index is 150. What is the six-month futures price?

3

Suppose that the risk-free interest rate is 10% per annum with continuous compounding and that the dividend yield on a stock index is 4% per annum. The index is standing at 400, and the futures price for a contract deliverable in four months is 405. What arbitrage opportunities does this create?

4-

The spot price of silver is $15 per ounce. The storage costs are $0.24 per ounce per year payable quarterly in advance. Assuming that interest rates are 10% per annum for all maturities, calculate the futures price of silver for delivery in nine months.

5

A stock is expected to pay a dividend of $1 per share in two months and in five months. The stock price is $50, and the risk-free rate of interest is 8% per annum with continuous compounding for all maturities. An investor has just taken a short position in a six-month forward contract on the stock. What is the futures price?

6

A U.S. Treasury bond pays a 7% coupon on January 7 and July 7. How much interest accrues per $100 of principal to the bond holder between July 7, 2011 and August 9, 2011? How would your answer be different if it were a corporate bond?

7

It is January 9, 2013. The price of a Treasury bond with a 12% coupon that matures on October 12, 2020, is quoted as 102-07. What is the cash price?

8

It is January 30. You are managing a bond portfolio worth $6 million. The duration of the portfolio in six months will be 8.2 years. The September Treasury bond futures price is currently 108-15, and the cheapest-to-deliver bond will have a duration of 7.6 years in September. How should you hedge against changes in interest rates over the next six months?

9

The price of a 90-day Treasury bill is quoted as 10.00. What continuously compounded return (on an actual/365 basis) does an investor earn on the Treasury bill for the 90-day period?

10/

It is May 5, 2011. The quoted price of a government bond with a 12% coupon that matures on July 27, 2014, is 110-17. What is the cash price?

11

Suppose that the Treasury bond futures price is 101-12. Which of the following four bonds is cheapest to deliver?

Bond Price Conversion Factor

1 125-05 1.2131

2 142-15 1.3792

3 115-31 1.1149

4 144-02 1.4026

Bond Price Conversion Factor

1 125-05 1.2131

2 142-15 1.3792

3 115-31 1.1149

4 144-02 1.4026

12

It is July 30, 2013. The cheapest-to-deliver bond in a September 2013 Treasury bond futures contract is a 13% coupon bond, and delivery is expected to be made on September 30, 2013. Coupon payments on the bond are made on February 4 and August 4 each year. The term structure is flat, and the rate of interest with semiannual compounding is 12% per annum. The conversion factor for the bond is 1.5. The current quoted bond price is $110. Calculate the quoted futures price for the contract.

13

On August 1 a portfolio manager has a bond portfolio worth $10 million. The duration of the portfolio in October will be 7.1 years. The December Treasury bond futures price is currently 91-12 and the cheapest-to-deliver bond will have a duration of 8.8 years at maturity. How should the portfolio manager immunize the portfolio against changes in interest rates over the next two months?

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