quiz1 - b) Riskless T-bills issued by the US Treasury is...

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Name Quiz 1 1. Gamma communications, which is involved in making key components of unmanned surveillance air- crafts, currently sells at $75 per share. Depending on whether republicans or democrats win the presidential election, its share price will be either $100 or $10 in one year. Answer: It pays o/ zero when the stock price reaches $100 and $90 if the stock price drops to $10.
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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 optiontoday? 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 options: & 100 100 & & 100 10 = & 90 : Hence the option price is $100 & $75 = $25 . 1...
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