Spring 2018 Homework 2.docx

Spring 2018 Homework 2.docx - FIN470 HOMEWORK 2 Due April 1...

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FIN470 HOMEWORK 2 Due April 1, 2018, at 8:00PM 1. The appendix at the end contains the prices of a set of Google Call options. They have 59 days to maturity (T=59 days). Suppose the risk-free rate is 0% per annum. The stock price of Google was 738.06. Assume all the options are European Options. a. Find two options for which the low boundary condition DOES NOT Hold and thus arbitrage opportunities exist. Calculate the minimum arbitrage profit. Option 1: Strike _________________; Profit per Contract _____________ Option 2: Strike _________________; Profit per Contract _____________ In general, if a call option does not satisfy the low boundary condition, we _______(buy/sell) the option, __________(long/short) the stock, and ___________ (lend/Borrow) to realize arbitrage profit. b. Find two pairs of options for which the relationship C ( K 1 ) ≥C ( K 2 ) for K 2 > K 1 DOES NOT HOLD and thus arbitrage opportunities exist. Calculate the minimum arbitrage profit. Pair 1: Strikes __________and ________; Minimum Profit ___________ Pair 2: Strikes __________and ________; Minimum Profit ___________ In general, if the relationship does not hold, we _______(buy/sell) the option with high strike price, __________(buy/sell) the option with low strike price.
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  • Spring '18
  • Hong Miao
  • Options, risk-free rate, Strike price, Finance, Derivatives, Stocks, Black Scholes Merton Model

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