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Questions-Equity and Bonds forward

The document presents a series of questions related to the pricing and valuation of bonds and equity contracts, focusing on forward contracts and the application of the no-arbitrage principle. It includes calculations for forward prices and values at initiation and after specific time periods, considering risk-free rates and dividend payments. The scenarios involve both zero coupon bonds and stocks, providing a comprehensive overview of asset pricing strategies.

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Imran� Shakir
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16 views

Questions-Equity and Bonds forward

The document presents a series of questions related to the pricing and valuation of bonds and equity contracts, focusing on forward contracts and the application of the no-arbitrage principle. It includes calculations for forward prices and values at initiation and after specific time periods, considering risk-free rates and dividend payments. The scenarios involve both zero coupon bonds and stocks, providing a comprehensive overview of asset pricing strategies.

Uploaded by

Imran� Shakir
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PDF, TXT or read online on Scribd
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Pricing and Valuation of bonds and equity contracts

Normal Asset class (or Zero Coupon Bond)

Q.1 Given as asset priced at 130 and a risk free annual rate is 4%. The one year forward price would be?

And what would be the value at the time of initiation?

Q.2 Consider a 3-Month forward contract on a Zero Coupon bond with a face value of 1000 that is
currently quoted at 500 and suppose that the annual risk free rate is 6%. Determine the price of the
forward contract under the No arbitrage principal? What is value of forward contract at the time of
initiation?

Q.3 In previous question, what would be the value of contract if bond is quoted at 510 after one month
in previous question and risk free rate will remain the same?

Equity Forward Contracts

Q.4 Calculate the no arbitrage forward price for 100 day forward on a stock that is currently priced at
30 and is expected to pay a dividend of 0.40 in 15 days, 0.40 in 85 days and 0.5 in 175 days. The annual
risk free rate is 5% and yield curve is flat.

Q.5 In previous example, stock is trading at 36 after 60 days, Calculate the value of equity of forward
contract on the stock to the long position, assuming the risk free rate is 5%.

Q.6 A stock is currently priced at 30 and is expected to pay a dividend at 0.30 in 20 days and 65 days from
now. What will be the forward contract price for 60 days if risk free rate is 5%?

Q.7 After 37 days, the stock in previous question is priced at 21 and the risk free rate is still 5%. What is
the value of the forward contract on the stock to the short position?

Q.8 A portfolio manager owns Macrogow Inc which is currently trading at 35 per share. She plans to sell
the stock in 120 days. But is concerned about a possible price decline. She decides to take a short position
in 120 days forward contract on the stock. The stock will pay 0.50 per share dividend in 35 days and 0.50
again in 125 days. The risk free rate is 4%. What will be the value of trader’s position in the forward
contract in 45 days assuming in 45 days the stock price is 27.50 and risk free rate has not changed

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