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17.When the interest rate is 5% per annum with continuous compounding, which of the following creates a principal protected note worth $1000?

A.A one-year zero-coupon bond plus a one-year call option worth about $59

B.A one-year zero-coupon bond plus a one-year call option worth about $49

C.A one-year zero-coupon bond plus a one-year call option worth about $39

D.A one-year zero-coupon bond plus a one-year call option worth about $29

A.A one-year zero-coupon bond plus a one-year call option worth about $59

B.A one-year zero-coupon bond plus a one-year call option worth about $49

C.A one-year zero-coupon bond plus a one-year call option worth about $39

D.A one-year zero-coupon bond plus a one-year call option worth about $29

Answer: B

A one-year zero-coupon bond is worth 1000e-0.05×1 or about $951. This leaves 1000−951 = $49 for buying the option.

A one-year zero-coupon bond is worth 1000e-0.05×1 or about $951. This leaves 1000−951 = $49 for buying the option.

Flashcard info:

Author: CoboCards-User

Main topic: Finance & Investment

Topic: Derivatives

Published: 27.10.2015