HO1 - Math 238 Financial Mathematics Problem set 1 These...

Info iconThis preview shows page 1. Sign up to view the full content.

View Full Document Right Arrow Icon
This is the end of the preview. Sign up to access the rest of the document.

Unformatted text preview: Math 238, Financial Mathematics Problem set 1 January 13, 2009 These problems are due on Tusday January 20 . You can give them to me in class, drop them in my office, or put them in my mailbox outside the mathematics department. Problem 1 Let S t be the current stock price, K the strike price of the option, T the expiration time of the option, t the current time, S T the stock price at time T , r the risk-free interest rate, c the price of a European call option and p the price of a European put option. Explain why the two portfolios (a) one European call option plus cash equal to Ke- r ( T- t ) , and (b) one European put option plus one share, have the same payoff at time T : max( S T ,K ). Deduce that the value of the portfolios today must be the same, so that c + Ke- r ( T- t ) = p + S . Explain this put-call parity relation with figures . (Ch. 8, Hull; Ch. 9, Bjork) Problem 2 Carry out a two-step binomial tree risk-neutral pricing analysis for an option whose payoff is f uu ,f ud ,f...
View Full Document

{[ snackBarMessage ]}

Ask a homework question - tutors are online