Present a possible arbitrage strategy

Assignment Help Finance Basics
Reference no: EM133072378

A trader sells a strangle by selling a call option with a strike price of $52 for $1 and selling a put option with a strike price of $43 for $8. For what range of prices of the underlying asset does the trader make a profit?

Assume that you observe the following. The spot exchange rate between the Swiss Franc and U.S. dollar was 1.0404 ($ per franc). Interest rates in the U.S. and Switzerland were 2.5% and 1.0% per annum, respectively, with continuous compounding. The three-month forward exchange rate was 1.0503 ($ per franc). Present a possible arbitrage strategy and show your profit.

A hedge fund is currently engaged in a plain vanilla interest rate swap with a company. Under the terms of the swap, the hedge fund receives six-month LIBOR and pays 6% per annum on a principle of $100 million for five years. Payments are made every 6 months. Assume that the interest rates start to soar after two years and the company defaults on the sixth payment date when the LIBOR rate is 8 percent for all maturities (with semi-annual compounding). The 6-months LIBOR rate 6-months ago is 7.5%. What is the loss to the hedge fund?

Reference no: EM133072378

Questions Cloud

What is the value of the share : Melbourne Ltd is now on a fast-growth phase and expects its dividends to grow at a rate of 15 per cent for the next 4 years. The dividends will then settle to a
What is double layer winding : What is Double Layer winding? Explain
Distribute excess cash to investors : "Debt finance is considered to be a solution to encourage managers to distribute excess cash to investors rather than investing in sub-optimal projects". Do you
Investing in sub-optimal projects : Debt finance is considered to be a solution to encourage managers to distribute excess cash to investors rather than investing in sub-optimal projects".
Present a possible arbitrage strategy : A trader sells a strangle by selling a call option with a strike price of $52 for $1 and selling a put option with a strike price of $43 for $8.
Total environmental health and safety management : Your organization, company that manufactures fitness equipment such as treadmills and elliptical machines, is about to introduce lean concepts into operations
Future outlook of the economy : 1. Suppose the yield curve is descending or downward sloping yield curve. What does it say about the future outlook of the economy and in what type of bonds inv
Identical assets structures and operating characteristics : Consider two firms with identical assets structures and operating characteristics: ABN and RPO. Both companies sell the same product and face the same distribut
What would be the journal entry the company would make : If the Company applies Lower of Cost or Market (LCM) to Each Item in inventory, what would be the journal entry the company would make

Reviews

Write a Review

Finance Basics Questions & Answers

  What subsequently happened to the prices

Groupon (GRPN) wen public a $20 a share and closed the first day at $26.11. Zynga (ZNGA) went public at $10 a share but closed the first day at $9.50. Facebook (FB) trading below $28 within two weeks for a 26.3 percent decline from the IPO offer pric..

  What is the operating cycle for the company

a) What is the operating cycle for the company? b) What is the net operating cycle for the company?

  Cost of common stock equity-capm

Find out the required return that J&M common stock should provide. Find out J&M's cost of common stock equity using the CAPM.

  Why is growth through merger and acquisition

Why is growth through merger and acquisition and vertical integration such an important strategy in healthcare now?

  Facebook has never paid a dividend

Mr. Milquetoast is enthusiastic about the prospects for Facebook. He wants to invest $100,000 in stock, but hesitates because Facebook has never paid a dividend

  Topic-company cash flow

There is a common phrase in business: "Cash is king." "Cash flow is the life-blood of a company. Without it, a company will fail" (Hicks, 2012).

  Comparing financial performance

You will evaluate the financial health of a Wal-Mart.  Conduct an industry comparison to estimate how your corporation's financial performance compares with others in its industry.

  Did the president single out banks

Why in this statement, did the president single out banks? Aren't supermarkets, airlines, software companies, and many other businesses also important to the economy?

  What is the dollar size of the issue

Butler Inc. needs to raise $14 million. Assuming that the market price of the firm's stock is $95, and flotation costs are 10 percent of the market price, how many shares would have to be issued? What is the dollar size of the issue?

  Constructing three kinds of housing complexes

Emaar is a real estate company based in Dubai and is considering for constructing three kinds of housing complexes. The three kinds of complexes are: small complex, medium complex and large complex.

  He genesis operations management team was excited to

he genesis operations management team was excited to understand the various options for securing financing to fund the

  Bond nominal yield to maturity and nominal yield to call

What are the bond's nominal yield to maturity and its nominal yield to call? Do not round intermediate calculations. Round your answers to two decimal places.

Free Assignment Quote

Assured A++ Grade

Get guaranteed satisfaction & time on delivery in every assignment order you paid with us! We ensure premium quality solution document along with free turntin report!

All rights reserved! Copyrights ©2019-2020 ExpertsMind IT Educational Pvt Ltd