RSK4805 Assignment 2 (ANSWERS) 2024 - DISTINCTION GUARANTEED

Well-structured RSK4805 Assignment 2 (ANSWERS) 2024 - DISTINCTION GUARANTEED. (DETAILED ANSWERS - DISTINCTION GUARANTEED!)..... Question text The volatility of an asset is 2% per day. What is the standard deviation of the percentage price change in sixteen days? Percentage change in price is Answer%. What extra information do you need to calculate the covariance if you know the correlation between two variables? standard deviation of the two variables covariance between the asset and the market standard deviation on only one of the variables correlation between the two variables Question 2 Not yet answered Marked out of 5.00 Flag question Question text An analyst for Bloom Ltd gathered the following information with regards to futures contract: • Current spot-market price of R60 • A risk-free interest rate of 8.87% per annum • The six-month futures contract is priced at R62.60 The actual futures price of the contract is R59. The actual futures price is Answer less thanmore thanthe same as the theoretical futures price. The futures price is Answer underpricedoverpricedcorrectly priced. Arbitrage strategy: • Answer buysell futures contract at R59 • Answer buysell the underlying R60 • Answer investborrow at risk-free rate for six months Question 3 Not yet answered Marked out of 5.00 Flag question Question text An investor enters into a short 1 months’ forward contract to sell 100,000 British pounds for US dollars. Use the rates in the table to indicate what position the investor will take and calculate the gain/loss of the transaction. Table Spot and forward quotes of the USD/GBP exchange rate Maturity Bid Offer Spot 1.2732 1.2736 1-month forward 1.2746 1.2751 3-month forward 1.2772 1.2777 1-year forward 1.2883 1.2889 If the exchange rate at the end of the contract is 1.34, the investor is obligated to Answer buysell pounds. If the exchange rate at the end of the contract is 1.34, the investor will invest in pounds at a price of Answer when they are worth 1.34. Enter to 4 decimal places (e.g. 2.3456) The investor will make a Answer gainloss. The gain/loss of the transaction is $ Answer. Enter dollar value (e.g. 1000) Question 4 Not yet answered Marked out of 5.00 Flag question Question text A binary option pays off $165 if a stock price is greater than $65 in three months. The current stock price is $50 and its volatility is 40%. The risk-free rate is 4% and the expected return on the stock is 10%. Note that some of the subsequent values were assumed and not calculated. 1. The risk-neutral probability of the payoffs (d2) is Answer. Enter the amount, either negative (e.g., -5.6789) or positive (e.g., 5.6789), rounded to four decimals. 2. Assume that d2 was calculated as – 1.4250 (minus 1.4250), use the tables to determine N(-d2), use interpolation. The probability is therefore Answer. Enter the four-decimal cumulative probability (e.g., 0.5832). 3. What will the value of the option be if N(-d2) were determined to be 0.1072? The value of the option is $Answer. Round your answer to two decimal places (e.g., 12.23) Question 5 Not yet answered Marked out of 5.00 Flag question Question text The current price of a stock is $150, and three-month European call options with a strike price of $155 currently sell for $5.00. An investor who feels that the price of the stock will increase is trying to decide between buying 100 shares and buying 3,000 call options. Both strategies involve an investment of $15,000. If the share price increases to $162, the gain to the investor if he bought call options will be $ Answer Enter dollar value (e.g. 1000) If the share price increases to $162, the gain to the investor if he bought shares will be $Answer Enter dollar value (e.g. 1000) It is therefore advisable for the investor to buy Answer call optionsshares to benefit from an increase in share price. For both the strategies to be equally profitable, the stock price should increase to $ Answer Enter dollar value and cents (e.g. 1000.11) Question 6 Not yet answered Marked out of 5.00 Flag question Question text A company’s investments earn ZARONIA minus 0.5%. Table Swap quotes made by market maker (percent per annum) Maturity (years) Bid Offer Swap rate 2 2.55 2.58 2.565 3 2.97 3.00 2.985 4 3.15 3.19 3.170 5 3.26 3.30 3.280 7 3.40 3.44 3.420 10 3.48 3.52 3.500 Use the Table to explain how the company can use the quoted rates to convert the investments to a two-year and seven-year fixed-rate investment, respectively. By entering into a two-year swap where it receives Answer 2.552.58 % and pays ZARONIA, the company earns Answer 2.052.08 % for two years. Enter to 2 decimal places (e.g. 2.34) By entering into a seven-year swap where it receives Answer 3.403.44 % and pays ZARONIA, the company earns Answer 2.902.94 % for seven years. Enter to 2 decimal places (e.g. 2.34) The company also borrowed money at 5.1% for five years and wishes to convert this borrowing to a floating-rate liability by making use of the swap quotes in the table. It enters into a five-year swap where it receives Answer 3.263.30 % and pays Libor. Enter to 2 decimal places (e.g. 2.34)