Quiz B4C14 Binomial Trees

Bafta is speculator planning to short Mac Ltd stocks currently trading at $50 as he thinks the stock price might fall in next 10 days. To execute the short sell Bafta borrowed 200 stocks of Mac Ltd from Iffa who bought 300 these stocks just a day before at $48 and (Bafta) sold it in the spot. After two days company issued dividend worth $2. On the 10th day, price increased to $60 and Iffa asked to Bafta to return stocks so that he can sell and earn a profit. Stocks were returned by the Bafta at the same time. Iffa waited for two days and sold these stocks at $62. Calculate the profit or loss to Bafta and Iffa.

Future contract and forward contract are similar in following properties except for

Copper is trading in the spot at the rate of $100 per KG. Sam owns 1Kg of copper and wants to sell it at the end of three months. Copper requires special storage ( warehouse ) arrangements, hence he incur storage cost of $10 at the time of withdrawing copper from the warehouse. Find out the forward rate of 1Kg of copper using the no-arbitrage theory where the risk-free rate is 5%

Sam owns stock of Skipe Inc. and wants to cover the exposure with 6 months forward. Sports rate of this stock is $50 and the dividend yield is 2% for the next 6 months. Find out the forward price assuming the no-arbitrage principle if the interest rate is 5%.

Which one of the following situation can cause backwardation phenomenon