# Finance questions

1. The information needed is:
Stock price = \$39
Exercise price = \$40
Time to maturity = 0.5 years
Risk-free rate = 10% per year
Stock volatility = standard deviation of 40%/year
Using the Black-Scholes option pricing formula, calculate the value of a European call option that will not pay a dividend. What is the intrinsic value of this option? What is the time value of this option?
2. Suppose that you have the following information about interest rates.
The price of a zero coupon risk-free bond maturing in one year is \$994
The price of a zero coupon risk-free bond maturing in two years is \$983
The price of a zero coupon risk-free bond maturing in three years is \$970
First, calculate the yield to maturity for the three bonds. Second, calculate each of the one year forward rates. Third, draw a diagram that shows the term structure of interest rates for these bonds showing both YTM and forward interest rates.
3. Suppose you sell a call option with a strike price of \$45 for \$3 and sell a put option with a strike price of \$45 for \$2 on the same stock. What is the pattern of payoffs from this investment look like on a payoff diagram? What is the most that you can gain or lose from this investment strategy?

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