Find the value of Jonathan’s portfolio. (c) Explain what duration is and calculate the duration of bonds I, II, III and IV. (d) Explain what convexity is and estimate, using duration and convexity, the value of Jonathan’s portfolio if interest rate falls by 1.5%. (5 marks) Show your workings clearly with calculations performed with Excel. Corporate Bond Coupon Rate Maturity Convexity Number of Bonds I 4.5% 12 months 0.33 600 II 5.5% 18 months 0.43 1200 III 6.5% 24 months 0.53 1800 IV 7.0% 6 months 0.63 2400 Maturity Coupon Rate Yield 6 months 0% 1.00% 12 months 0% 1.50% 18 months 1.5% 2.00% 24 months 2.0% 2.5% (5 marks) (5 marks) (5 marks) Question 5 Answer the following questions on option pricing. Assume that the current price of a stock is $95, the risk-free rate is 3%, the up and down factors are 1.50 and 0.67 respectively. (a) Compute the price of an ATM European put option that matures in 1 year by using a 3-step binomial model. (5 marks) (b) Compute the price of an ATM American call option that matures in 1 year by using a 3-step binomial model. (5 marks) (c) Compute the price of an ATM Asian put option that matures in 1 year by using a 3- step binomial model. (5 marks) (d) Compare and contrast the price that is calculated in (a) with the price that is calculated with the Black-Scholes model. Show your workings clearly with calculations performed with Python.
Recent Comments