Two-Step Tree and Butterfly Spread: Questions

1. A company enters into a short futures contract to sell $5000. The current future price is 250 cents per pound. The initial margin is $3000 and the maintenance margin is $2000. What price change would lead to a margin call? Under what circumstances $1500 could be withdrawn from the margin account? 2. Stock is expected to pay a dividend of Tk 10 per share in 2 months and again in 5 months. The stock price is Tk 500 and risk free rate of interest is 8% p.a. with continuously compounded for all maturities. An investor has just taken a short position in a 6- month forward contract on the stock. a. What are the forward price and the initial value of the forward contract? b. Three months later, the price of the stock is 480 and the risk free rate is still 8% per annum. What are the forward price and the value of the short position in the forward contract? 3. Under the terms of an interest rate swap, a financial institution has agreed to pay 10% per annum and to receive three month LIBOR in return on a notational principle of TK 100 million with payments being exchanged every three months. The swap has a remaining life of 14 months. The average of the bid and offer fixed rates currently being swapped for three month LIBOR is 12% per annum for all maturities. The three month LIBOR rate one month ago was 11.8% per annum. All rates are compounded quarterly, what is the value of the swap? 4. A four month European call option on a non-dividend paying stock is currently selling for $5. The stock price is $64, the strike price is $60 and a dividend of $0.80 is expected in one month. The risk free interest rate is 12% per annum for all maturities. What opportunities are there for an arbitrageur? 5. A Tk 100 million interest rate swap has a remaining life of 10 months. Under the terms of the swap, six month LIBOR is exchanged for 12% per annum (compounded semiannually). The average of the bid offer rate is being exchanged for six month LIBOR in