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Part A (5 marks):
Part B (5 marks):
The current price of an asset is $80, the riskless interest rate is 5% p.a. continuously compounded, and the option maturity is five years. What is the lower boundary for the value of a European vanilla Call option with strike price of $90?’
Part C (5 marks)
Two companies have investments which pay the following rates of interest:
Firm A: Fixed – 6%, Floating – LIBOR
Firm B: Fixed – 8%, Floating – LIBOR + 1%
Assume A prefers a fixed rate and B prefers a floating rate. Show how these two firms can both benefit by entering into a swap agreement. If an intermediary charges both parties equally a 0.1% fee and any benefits are spread equally between Firm A and Firm B, what rates could A and B receive on their preferred interest rate? Draw swap diagram and explain.
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