1.
Certainty equivalent method
– In class we discussed the pricing of Boomers, Busters and
Bogglers, but didn’t calculate the actual prices.
Do so using the certainty equivalent method.
Assume that each year the market return is either 20% or 4%, with equal probability.
A Boomer
is a perpetuity that pays $200 each year r
m
= 20% and 0 otherwise.
A Buster is a perpetuity that
pays $200 each year r
m
= 4% and 0 otherwise.
A Boggler is a perpetuity that pays $200 each
year r
m
= 4% and pays $200 otherwise.
That is, the Boggler has the same payoffs as a portfolio
that is long one Buster and short one Boomer.
Assume r
f
= 5%.
2.
In class we discussed
putcall parity
.
I’d like you to check whether option prices conform to
putcall parity.
Pick a stock (other than Google) with traded options.
(In general, technology
stocks and stocks with more volatile returns tend to have more active options markets.)
Use
Yahoo!Finance, or some other data source, to get the prices of a put and call with the same
strike price and maturity date as each other.
You want to pick options that are somewhat
actively traded, therefore choose “atthemoney” options (with strike prices close to the current
stock price).
Determine the riskfree rate that corresponds with the maturity of the options.
This preview has intentionally blurred sections. Sign up to view the full version.
View Full Document
This is the end of the preview.
Sign up
to
access the rest of the document.
 Fall '07
 Trimbath
 riskfree rate, Strike price

Click to edit the document details