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IEOR 4700: Derman: Homework 1: Wednesday September 9 2015 Page 1 of 3 Homework 1: Wednesday September 9 2015 Due Monday September 21 2015. Problem 1....
1) Slowistan is a small island country whose currency is the US dollar. On Jan 1 2015 the price of astock S was quoted for sale on the Slowistan stock market at $50. Slowistan’s stock market settlementconvention is T + 2 months. Suppose interest rates are 10% per year, compounded annually.What would you pay for the stock if Slowistan suddenly changes its settlement convention to T+1month? Assume the year consists of 12 months each 30 days long.
2) Consider two of the conventions for quoting US interest rates:
(i) semi-annual compounding with 30/360 daycount (denoted Ysm for semi-bond since it’s used in the bond markets); and
(ii) annual compounding with act/360 daycount (denoted Yam for annual-money, since it’s used in the money markets).Derive an expression for in terms of . To make life simple, assume all years have 365days.
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