Fin 441 Hw1

Fin 441

Homework #1

1. Days to expires        =        72        days

Bid discounts        =        7.44

Ask discounts        =        7.20

Average discount =        (7.44+7.20)/2        =        7.32

72 days $100 T-bill price        =        100 - 7.32*(72/360)        =        98.536

T-bill annualized yield        =        (100/98.536)^(365/7) – 1        =        7.76%

Intrinsic Value = Max(0, Market price – Exercise price)

Jul:        165.13 – 160 = 5.13

Aug:        165.13 – 170 = -4.87 => 0

Oct:        165.13 – 155 = 10.13

Time Value = Market price – Intrinsic Value

Jul:        6.00 – 5.13        = 0.87

Aug:        3.20 – 0        = 3.20

Oct:        14.00-10.13        = 3.87

T = Days to expire / 365

TJul = 14/365 = 0.0384

TAug = 49/365 = 0.1342

TOct = 105/365 = 0.2877

Lower Bound = Max(0, Market price – Exercise Price*(1+Risk free rate)^(-T)

Jul:        165.13 – 160*(1+0.0516)^(-0.0384)        =        5.44

Aug:        165.13 – 170*(1+0.055)^(-0.1342)        =        -3.65        =>        0

Oct:        165.13 – 155*(1+0.0588)^(-0.2877)        =        12.66

Intrinsic Value = Max(0, Exercise price – Market price)

Jul:        165 - 165.13        = -0.13 => 0

Aug:        160 – 165.13         = -5.13 => 0

Oct:        170 – 165.13        = 4.87

Time Value = Market price – Intrinsic Value

Jul:        2.35 – 0        = 2.35