Problem Set 10.pdf

# Problem Set 10.pdf - Problem Set 10 Foundations of Finance...

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Problem Set 10 Foundations of Finance Due Date: 15 May. 2017 Question 1: Fill in the following payoff table (as a function of the stock price in 1 year) of a portfolio that is (i) long one share of stock, (ii) long one 1-year put with an exercise price of \$50, (iii) short one 1-year call with an exercise price of \$60, (iv) short one 1-year call with an exercise price of \$80, and (v) short a 1-year zero-coupon bond with a face amount of \$40. Graph the payoff as a function of the stock price in 1 year. (Note: Payoff not profit, ignore the cost of these securities.) Price \$30 \$40 \$50 \$60 \$70 \$80 \$90 \$100 \$110 Long Stock Long Put (X=50) Short Call (X=60) Short Call (X=80) Short Bond (F=40) Total Payoff Question 2: Suppose you observe the following data for a certain stock: Stock price: \$110.5 Call price (6 months to maturity (t=0.5), X=105): 14 Put price (6 months to maturity (t=0.5), X=105): 5.5 Risk free rate: 5% assume that it is continuously compounded. Does this violate the put call parity?
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