Peanuts | |
Risk Free Rate | 5% |
Market Risk Permium | 7% |
Peanuts Beta | 3 |
Possible Peanuts Prices | Probability distribution |
$ 55.00 | 10% |
$ 59.44 | 10% |
$ 63.89 | 10% |
$ 68.33 | 10% |
$ 72.78 | 10% |
$ 77.22 | 10% |
$ 81.67 | 10% |
$ 86.11 | 10% |
$ 90.56 | 10% |
$ 95.00 | 10% |
01 Question: What is the expected spot price for peanuts? | NAME: | ||
Stephen: Stephen: The expected return is the sum of the probabilities * peanut prices | 02 Question: What is the current spot price for peanuts? | ||
Stephen: Stephen: According to CAPM the discount rate is the risk free rate + Beta * risk premium. The spot price is the present value of expected price for peanuts. | 03 Question: Create a payoff table and payoff diagram for a long forward and a short forward on a peanut contract with a forward price of $65 and the possible peanut prices listed in the Data – Fact worksheet. | ||
Forward Price | $65.00 | ||
Future Possible Peanut Prices | |||
States of Peanut Prices Stephen: Stephen: Use the transpose function to list the possible peanut prices. |
|||
Long Forward Payoff | |||
Short Forward Payoff | |||
Chart Here. One series for the long forward and the other series for the short forward. | |||
04 Question: Create a portfolio consisting of a long position in peanuts and a short forward in a peanut contract with a forward price of $65. List the assets in the portfolio, the value of the assets and the total cost of the portfolio. Then create a payoff table showing the portfolio’s final payoff in all possible states. | |||
Assets in Portfolio | Long in Peanuts | Short Forward | Portfolio Value |
Value of Portfolio Assets | |||
Future Possible Peanut Prices | |||
States of Peanut Prices | |||
Long Peanuts | |||
Short Forward Payoff | |||
Portfolio Payoff |
05 Question: If the forward price is $ 65 then is there a risk free arbitrage opportunity? If there is an arbitrage opportunity then list the assets in the portfolio and detemine if you taking a long position in the asset or a short position. Determine the total cost of the portfolio. If you are recieving funds from the portfolio then make the cost negative. | ||
Forward Price | $65.00 | NAME |
Assets in Portfolio | Portfolio Value | |
Value of Portfolio Assets | ||
06 Question: Based on your answer from question 5 create a payoff table for your portfolio. | ||
Future Possible Peanut Prices | ||
States of Peanut Prices | ||
Portfolio Payoff | ||
07 Question: Using Goal Seek determine the forward price that will cause the arbitrage opportunity to disappear. Copy your answer below and reset Questions 5’s forward rate back to $65 | ||
Hard copy forward rate here. | ||
08 Question: What is the forward price using the formula you learned in class? | ||
09 Question: Does the forward price equal the expected spot price? | ||
10 Question: Determine the Beta that will set the forward price equal to the expected spot price. Besure to set the beta in the Data-Fact worksheet back to 3 after answering this question!!. Stephen: Stephen: I would suggest using goal seek to answer this question. |
||
Hard Copy Beta value here | ||
11 Question: At what discount rate will the forward price on peanuts equal the expected spot price on peanuts. (Hint look at question 10) Stephen: Stephen: What is the discount rate when you use Question 10’s Beta? |
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