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PC 5 Fixed Income
PC 5 Fixed Income
PC 5 Fixed Income
Practice 5
The current exchange rate for the Japanese Yen is 113.51 Yens per US Dollar, the risk
free annually compounded interest rate in the United States is 1.25% while the risk free
annually compounded interest rate in Japan is 0.15%.
Question 1. (1 point) Based on these rates, what forward exchange rate for one year
maturity is consistent with no arbitrage? Give your answer in Japanese Yen per US Dollar
rounded to the nearest second decimal.
Question 2. (2 points) You can buy or sell Yens forward with maturity one year for 109.45
Yens per US Dollar. How much arbitrage profit can you generate in one year in US Dollar
assuming that you borrow or lend USD 1 million for one year to realize this arbitrage. Give
your answer rounded to the nearest dollar.
You observe the following prices in USD of a put and two calls written on a stock which
does not distribute any dividends. The three options are European and expire in one year.
The annually compounded risk free rate is 2%. We assume in this problem that there is no
bid-ask spread on any security.
Question 3. (2 points) In absence of arbitrage what is the value of the European put
written on the same underlying with strike price USD 60 and expiring in one year? Give
your answer rounded to the nearest cent.
1
We consider the strategy described by its payoff at some maturity T as a function of the
price ST of a given underlying through the following graph.
15
10
Payoff at Maturity
0 ST
40 50 70 100
−5
The next table reports the current bid and ask prices of some European calls written on
the underlying with the same maturity as the strategy and various strike prices.
Question 4. (2 points) How much do you spend to put in place the strategy? Give your
answer rounded to the nearest cent (enter for instance 1.23 if the value you find is 1.226).
We consider a two period binomial model for the evolution of the stock price S of the share
of a company. The current price S0 in Period 0 is USD 50. Each period, the share price
may either go up by 20% or go down by 20%. The following recombining tree describes the
evolution of the share price.
2
Suu = S0 u2 = 72
Su = S0 u = 60
S0 = 50 Sud = S0 ud = 48
Sd = S0 d = 40
Sdd = S0 d2 = 32
The company does not distribute any dividend. The constant risk free rate from one period
to the next is 5%, meaning that a risk free investment of USD 1 becomes USD 1.05 the
next period.
We consider an at the money put written on the share of the company with strike price
USD 50 and expiring in Period 2. For the following two questions, give your answer rounded
to the nearest cent (enter for instance 1.23 if the value you find is USD 1.226).
The following table reports the annually compounded yields to maturity for zero coupon
bonds with various maturities expressed in years.
Maturity YTM
0.5 1.2%
1.0 1.3%
1.5 1.4%
2.0 2.0%
2.5 2.5%
3.0 2.8%
We consider a bond which was issued a few years ago and which matures in two years
and a half. Its face value is EUR 1, 000, its coupon rate is 4% and it pays coupons annually
with the first coupon due in half a year.
Question 7. (2 points) What is the annually compounded yield to maturity of the bond?
Give your answer as a number rounded to the fourth decimal (answer for instance 0.0123 if
the yield which you find is 1.23%).
Question 8. (1 point) What is the clean price of the bond? Give your answer rounded to
the nearest cent.
3
Problem 6. Bond Portfolio (3 points)
that you convert a maturity in years by dividing the number of days to maturity by 365).
Give your answer rounded to the nearest Euro.