On the lush moon Pandora in the Alpha Centauri star system there is a well operating stock market. One of the stocks in this market is RDA Corporation. There are the last 6 months of return history for both RDA stock and the Market as a whole. Using the CAPM model, determine what the risk-free rate of return is on Pandora.
Month RDA Return Market return
1 0.14 0.10
2 0.07 0.08
3 0.23 0.16
4 0.06 0.00
5 0.03 0.06
6 0.05 0.07
Below are call and put option prices for Klingon Fasteners, September 20, 2013.
The stock price of Klingon Fasteners that day was 38.17. The Options are due January 11, 2014. Given all this, what annual interest rate is implied by these prices?
Some hints:
1) Use put-call parity, and the exponential formula for the price of money.
2) There will be several implied interest rates, one for each strike price.
3) You have to take a natural logarithm to calculate the answers.
4) The natural log of exp(A)=A.
5) Calculate interest rates to six digits.
Strike Price Call Price Put Price
32.50 6.95 0.85
34.00 5.90 0.95
35.00 4.45 1.10
36.00 3.80 1.55
37.50 4.20 1.70
39.00 3.20 1.90
40.00 2.13 2.30
41.00 2.00 3.80
42.50 1.20 5.20
44.00 0.85 5.70
You sense an put-call arbitrage possibility on Barayaran Export Enterprises stock. The current risk-free interest rate is 2%. The time to expiration is 18 months. The strike price is 75. The call option sells for 6.479, while the put option sells for 9.334. The price of the stock is X. As X runs from 65 to 75, carefully describe your arbitrage strategy. Show how much profit you will make in 18 months on a nice graph with 50 data points. Do NOT turn in a huge tree-killing table.
You have been given a $1000 face bond that matures in 6 months. It currently sells for $950. What is the interest rate per year? What will the bond be worth in 3 months? Please show your work.