The current gold price is $**700**, gold storage costs are **2**% pa and the risk free rate is **10**% pa, both with **continuous compounding**.

What should be the **3** year gold futures price?

A **2**-year futures contract on a stock paying a continuous dividend yield of **3**% pa was bought when the underlying stock price was $**10** and the risk free rate was **10**% per annum with **continuous compounding**. Assume that investors are risk-neutral, so the stock's total required return is the risk free rate.

Find the forward price ##(F_2)## and value of the contract ##(V_0)## initially. Also find the value of the contract in 6 months ##(V_{0.5})## if the stock price rose to $**12**.

An equity index is currently at **5,000** points. The **2** year futures price is **5,400** points and the total required return is **8**% pa with continuous compounding. Each index point is worth $**25**.

What is the implied continuous dividend yield as a continuously compounded rate per annum?

A stock is expected to pay a dividend of $**5** per share in **1** month and $**5** again in **7** months.

The stock price is $**100**, and the risk-free rate of interest is **10**% per annum with continuous compounding. The yield curve is flat. Assume that investors are risk-neutral.

An investor has just taken a **short** position in a **one** year forward contract on the stock.

Find the forward price ##(F_1)## and value of the contract ##(V_0)## initially. Also find the value of the short futures contract in 6 months ##(V_\text{0.5, SF})## if the stock price fell to $**90**.

A $**100** stock has a continuously compounded expected **total** return of **10**% pa. Its **dividend** yield is **2**% pa with continuous compounding. What do you expect its price to be in **one** year?

A $**100** stock has a continuously compounded expected **total** return of **10**% pa. Its **dividend** yield is **2**% pa with continuous compounding. What do you expect its price to be in **2.5** years?

An equity index is currently at **5,200** points. The **6** month futures price is **5,300** points and the total required return is **6**% pa with continuous compounding. Each index point is worth $25.

What is the implied dividend yield as a continuously compounded rate per annum?

An equity index is currently at **4,800** points. The **1.5** year futures price is **5,100** points and the total required return is **6**% pa with continuous compounding. Each index point is worth $25.

What is the implied dividend yield as a continuously compounded rate per annum?

**Question 691** continuously compounding rate, effective rate, continuously compounding rate conversion, no explanation

A bank quotes an interest rate of **6**% pa with quarterly compounding. Note that another way of stating this rate is that it is an annual percentage rate (APR) compounding discretely every 3 months.

Which of the following statements about this rate is **NOT** correct? All percentages are given to 6 decimal places. The equivalent:

**Question 707** continuously compounding rate, continuously compounding rate conversion

Convert a **10**% effective annual rate ##(r_\text{eff annual})## into a continuously compounded annual rate ##(r_\text{cc annual})##. The equivalent continuously compounded annual rate is:

**Question 708** continuously compounding rate, continuously compounding rate conversion

Convert a **10**% continuously compounded annual rate ##(r_\text{cc annual})## into an effective annual rate ##(r_\text{eff annual})##. The equivalent effective annual rate is:

Which of the following interest rate quotes is **NOT** equivalent to a **10**% effective annual rate of return? Assume that each year has 12 months, each month has 30 days, each day has 24 hours, each hour has 60 minutes and each minute has 60 seconds. APR stands for Annualised Percentage Rate.

**Question 710** continuously compounding rate, continuously compounding rate conversion

A continuously compounded **monthly** return of 1% ##(r_\text{cc monthly})## is equivalent to a continuously compounded **annual** return ##(r_\text{cc annual})## of:

**Question 711** continuously compounding rate, continuously compounding rate conversion

A continuously compounded **semi-annual** return of **5**% ##(r_\text{cc 6mth})## is equivalent to a continuously compounded **annual** return ##(r_\text{cc annual})## of:

**Question 719** mean and median returns, return distribution, arithmetic and geometric averages, continuously compounding rate

A stock has an arithmetic average continuously compounded return (AALGDR) of **10**% pa, a standard deviation of continuously compounded returns (SDLGDR) of **80**% pa and current stock price of $**1**. Assume that stock prices are log-normally distributed.

In **one** year, what do you expect the mean and median prices to be? The answer options are given in the same order.

**Question 720** mean and median returns, return distribution, arithmetic and geometric averages, continuously compounding rate

A stock has an arithmetic average continuously compounded return (AALGDR) of **10**% pa, a standard deviation of continuously compounded returns (SDLGDR) of **80**% pa and current stock price of $**1**. Assume that stock prices are log-normally distributed.

In **5** years, what do you expect the mean and median prices to be? The answer options are given in the same order.

**Question 721** mean and median returns, return distribution, arithmetic and geometric averages, continuously compounding rate

Fred owns some Commonwealth Bank (CBA) shares. He has calculated CBA’s monthly returns for each month in the past 20 years using this formula:

###r_\text{t monthly}=\ln \left( \dfrac{P_t}{P_{t-1}} \right)###He then took the arithmetic average and found it to be **1**% per month using this formula:

He also found the standard deviation of these monthly returns which was **5**% per month:

Which of the below statements about Fred’s CBA shares is **NOT** correct? Assume that the past historical average return is the true population average of future expected returns.

**Question 722** mean and median returns, return distribution, arithmetic and geometric averages, continuously compounding rate

Here is a table of stock prices and returns. Which of the statements below the table is **NOT** correct?

Price and Return Population Statistics |
||||

Time | Prices | LGDR | GDR | NDR |

0 | 100 | |||

1 | 50 | -0.6931 | 0.5 | -0.5 |

2 | 100 | 0.6931 | 2 | 1 |

Arithmetic average | 0 | 1.25 | 0.25 | |

Arithmetic standard deviation | -0.6931 | 0.75 | 0.75 | |

**Question 723** mean and median returns, return distribution, arithmetic and geometric averages, continuously compounding rate

Here is a table of stock prices and returns. Which of the statements below the table is **NOT** correct?

Price and Return Population Statistics |
||||

Time | Prices | LGDR | GDR | NDR |

0 | 100 | |||

1 | 99 | -0.010050 | 0.990000 | -0.010000 |

2 | 180.40 | 0.600057 | 1.822222 | 0.822222 |

3 | 112.73 | 0.470181 | 0.624889 | 0.375111 |

Arithmetic average | 0.0399 | 1.1457 | 0.1457 | |

Arithmetic standard deviation | 0.4384 | 0.5011 | 0.5011 | |

**Question 779** mean and median returns, return distribution, arithmetic and geometric averages, continuously compounding rate

Fred owns some BHP shares. He has calculated BHP’s monthly returns for each month in the past 30 years using this formula:

###r_\text{t monthly}=\ln \left( \dfrac{P_t}{P_{t-1}} \right)###He then took the arithmetic average and found it to be **0.8**% per month using this formula:

He also found the standard deviation of these monthly returns which was **15**% per month:

Assume that the past historical average return is the true population average of future expected returns and the stock's returns calculated above ##(r_\text{t monthly})## are normally distributed. Which of the below statements about Fred’s BHP shares is **NOT** correct?

**Question 790** mean and median returns, return distribution, arithmetic and geometric averages, continuously compounding rate, log-normal distribution, VaR, confidence interval

A risk manager has identified that their hedge fund’s continuously compounded portfolio returns are normally distributed with a mean of **10**% pa and a standard deviation of **30**% pa. The hedge fund’s portfolio is currently valued at $**100** million. Assume that there is no estimation error in these figures and that the normal cumulative density function at 1.644853627 is 95%.

Which of the following statements is **NOT** correct? All answers are rounded to the nearest dollar.

**Question 791** mean and median returns, return distribution, arithmetic and geometric averages, continuously compounding rate, log-normal distribution, VaR, confidence interval

A risk manager has identified that their pension fund’s continuously compounded portfolio returns are normally distributed with a mean of **5**% pa and a standard deviation of **20**% pa. The fund’s portfolio is currently valued at $**1** million. Assume that there is no estimation error in the above figures. To simplify your calculations, all answers below use **2.33** as an approximation for the normal inverse cumulative density function at **99**%. All answers are rounded to the nearest dollar. Which of the following statements is **NOT** correct?

**Question 792** mean and median returns, return distribution, arithmetic and geometric averages, continuously compounding rate, log-normal distribution, confidence interval

A risk manager has identified that their investment fund’s continuously compounded portfolio returns are normally distributed with a mean of **10**% pa and a standard deviation of **40**% pa. The fund’s portfolio is currently valued at $**1** million. Assume that there is no estimation error in the above figures. To simplify your calculations, all answers below use **2.33** as an approximation for the normal inverse cumulative density function at 99%. All answers are rounded to the nearest dollar. Assume one month is 1/12 of a year. Which of the following statements is **NOT** correct?