Answer to Question #297370 in Financial Math for Ram

Question

{F} (C) An individual purchases a car for $15,000. The purchaser takes out a loan for this amount that involves him making 24 monthly payments in advance. The annual rate of interest is 12.36% per annum effective. Calculate the flat rate of interest on the loan.

(D) (a) A forward contract with a settlement date at time T is issued based on an underlying asset with a current price of B.

The annualised risk-free force of interest applying over the term of the forward contract is δ and the underlying asset pays no income. Show that the theoretical forward price is given by K = BeδT , assuming no arbitrage.

(b) An asset has a current market price of 200P , and will pay an income of 10P in exactly three months’ time. Calculate the price of a forward contract to be settled in exactly six months, assuming a risk-free rate of interest of 8% per annum convertible quarterly.