"Derivative"exercise: Pricing and Valuation
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Questions 1:
A swap that involves the exchange of a fixed payment for a floating payment can be interpreted as a series of forward contracts with different expiration dates. These implied forward contracts will most likely have:
A 、different prices due to differences in the price of the underlying at expiration.
B、 identical prices.
C、 different prices due to differences in the cost of carry.
Questions 2:
Holding other factors constant, the value of a European put option will most likely decrease as the:
A、 risk-free interest rate increases.
B、 volatility of the underlying increases.
C、 value of the underlying decreases.
C is correct. Due to differences in the cost of carry, implied forward contracts will have different prices. The differences in the cost of carry stem from the timing differences of the payments.
A is incorrect. Differences in price are due to differences in the cost of carry. The price of the underlying at expiration is irrelevant for the price. It determines the value of the swap.
B is incorrect. The prices will be different due to differences in the cost of carry
A is correct. The value of a European put option will decrease as the risk-free interest rate increases.
B is incorrect. The value of a European put option will increase as the volatility of the underlying increases.
C is incorrect. The value of a European put option will increase as the value of the underlying decreases.
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