Unformatted text preview: b) Riskless T-bills issued by the US Treasury is trading at $100. It will pay a face value of $100 in one year regardless of who gets elected. Using the absence of arbitrage, what should be the price of the Gamma &put option±today? What is the composition of your replicating portfolio? Answer: We hold one bond and short one share of the stock. The resulting payo/ is the same as the option²s: & 100 100 ± & & 100 10 ± = & 90 ± : Hence the option price is $100 & $75 = $25 . 1...
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This note was uploaded on 03/19/2008 for the course FI 478 taught by Professor Yu during the Spring '08 term at Michigan State University.
- Spring '08