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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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- Spring '08