Midterm L3L4
Midterm L3L4
Midterm L3L4
Midterm Exam
Tuesday, March 22, 2022
1
3 (35 points) Swaps of Stocks
The spot price of stock ABC is traded at $50 per share. Stock ABC pays a constant dividend
yield of 5% per annum, continuously-compounded.
The 1, 2, 3 year zero-coupon bonds with face value $1000 trade at $990.05, $975.31 and
$961.75, respectively.
(i) (6 points) What are the annualized continuously-compounded risk-free rates for 1 year,
2 year and 3 year deposits?
(ii) (6 points) What are the 1-year, 2-year and 3-year forward prices for one share of ABC?
(iii) (8 points) What is the swap price for ABC for a swap contract with maturity 3 years
and one settlement after 1 year, 2 years and 3 years, respectively?
(iv) (15 points) Suppose after 1 year, after the first settlement, the spot price of stock
ABC is $52, and 1 and 2 year zero coupon bonds with face value $1000 cost $990.05
and $975.31, respectively. How much can an investor with a long position of the swap
in (iii) get right after the first settlement if he or she tries to close the contract in the
market?
(i) (5 points) What is Et [St+1 ], the time-t expectation of the payoff of the asset at t + 1?
(iii) (10 points) Suppose there is a forward market for the asset. What is the theoretical
forward price at time t for maturity t + 1?