FIN3094 Financial Economics II
Semester: August 2022
Instructor: Prof. Chaiporn Vithessonthi
Problem Set 1
1. Suppose the spot price of a common stock S(0) = $125 and the risk-free rate r = 8%.
Find a forward rate F(0,1) for the stock with delivery date one year from now (T = 1).
2. Let the current bond price B(0) and the future bond price B(1) be $100 and $104,
respectively. Let the current stock price S(0) be $70. Given a forward price of stock F
with delivery date 1 is $72, is it possible to find an arbitrage opportunity? If so, how?
3. Suppose the spot price of a common stock S(0) = $48 and the risk-free rate r = 14%.
Find a forward rate F(0,2) for the stock with delivery date one year from now (T = 2).
4. Suppose the spot price of a common stock S(0) = $70, a dividend D(t) = $4 is paid at
time t = 0.5, and the risk-free rate r = 3%. Find F(0,T) for the stock with delivery date
one year from now (T = 1).
5. Suppose the spot price of a common stock S(0) = $75, F(0,1) = $78.85, and the riskfree rate r = 5%. Suppose at an intermediate time t = 0.5, the stock price S(0.5) = $78,
and thus a forward contract initiated at time t with the same delivery date T has a
forward price F(0.5,1) = $79.97. Find the time t value of the forward contract with
forward price F(0,1).