1、Explain what happens when an investor shorts a certain share. The investors broker borrows the shares from another clients account and sells them in the usual way. To close out the position, the investor must purchase the shares. The broker then replaces them in the account of the client from whom t
2、hey were borrowed. The party with the short position must remit to the broker dividends and other income paid on the shares. The broker transfers these funds to the account of the client from whom the shares were borrowed. Occasionally the broker runs out of places from which to borrow the shares. T
3、he investor is then short squeezed and has to close out the position immediately. Problem 5.2.What is the difference between the forward price and the value of a forward contract? The forward price of an asset today is the price at which you would agree to buy or sell the asset at a future time. The
4、 value of a forward contract is zero when you first enter into it. As time passes the underlying asset price changes and the value of the contract may become positive or negative. Problem 5.3.Suppose that you enter into a six-month forward contract on a non-dividend-paying stock when the stock price
5、 is $30 and the risk-free interest rate （with continuous compounding） is 12% per annum. What is the forward price?The forward price is Problem 5.4.A stock index currently stands at 350. The risk-free interest rate is 8% per annum （with continuous compounding） and the dividend yield on the index is 4
6、% per annum. What should the futures price for a four-month contract be?The futures price is Problem 5.5.Explain carefully why the futures price of gold can be calculated from its spot price and other observable variables whereas the futures price of copper cannot. Gold is an investment asset. If th
7、e futures price is too high, investors will find it profitable to increase their holdings of gold and short futures contracts. If the futures price is too low, they will find it profitable to decrease their holdings of gold and go long in the futures market. Copper is a consumption asset. If the fut
8、ures price is too high, a strategy of buy copper and short futures works. However, because investors do not in general hold the asset, the strategy of sell copper and buy futures is not available to them. There is therefore an upper bound, but no lower bound, to the futures price. Problem 5.6.Explai
9、n carefully the meaning of the terms convenience yield and cost of carry. What is the relationship between futures price, spot price, convenience yield, and cost of carry?Convenience yield measures the extent to which there are benefits obtained from ownership of the physical asset that are not obta
10、ined by owners of long futures contracts. The cost of carry is the interest cost plus storage cost less the income earned. The futures price, , and spot price, , are related by where is the cost of carry, is the convenience yield, and is the time to maturity of the futures contract. Problem 5.7.Expl
11、ain why a foreign currency can be treated as an asset providing a known yield. A foreign currency provides a known interest rate, but the interest is received in the foreign currency. The value in the domestic currency of the income provided by the foreign currency is therefore known as a percentage
12、 of the value of the foreign currency. This means that the income has the properties of a known yield. Problem 5.8.Is the futures price of a stock index greater than or less than the expected future value of the index? Explain your answer. The futures price of a stock index is always less than the e
13、xpected future value of the index. This follows from Section 5.14 and the fact that the index has positive systematic risk. For an alternative argument, let be the expected return required by investors on the index so that. Because and, it follows that. Problem 5.9.A one-year long forward contract o
14、n a non-dividend-paying stock is entered into when the stock price is $40 and the risk-free rate of interest is 10% per annum with continuous compounding.a） What are the forward price and the initial value of the forward contract?b） Six months later, the price of the stock is $45 and the risk-free i
15、nterest rate is still 10%. What are the forward price and the value of the forward contract?a） The forward price, , is given by equation （5.1） as:or $44.21. The initial value of the forward contract is zero. b） The delivery price in the contract is $44.21. The value of the contract, , after six months is given by equation （5.5） as:i.e., it is $2.95. The forward price is:or $47.31. Problem 5.10.The risk-free rate of interest is 7% per annum with continuous compounding, and the dividend yield on a stock index is 3.2% per annum. The current value of th
