Midterm Solutions_2008

Midterm - Hagfraeði og staerðfraeði fjármálamarkaða Lausnir við miðannarprófi 2008 1a put C=(K-S(1 i (1 0,18  1 120 =(90-120 = 0 ii

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Unformatted text preview: Hagfraeði og staerðfraeði fjármálamarkaða Lausnir við miðannarprófi 2008. 1a) put: C=(K-S(1)) + i.  (1+0,18) +  1 120 = (90-120) + = 0 ii.  (1+0,18) +  1 80 = (90-80) + = 10 Í subtract equation ii. From equation i. and get:  1 120 -  1 80 = -10 =>  1 = -0,25 =>  (1+0,18) + -0,25*80 = 10 =>  0 = 25,424 I take a short position of 0,25 shares of S(t) and deposit 25,424 in the bank. Arbitrage free price is therefore C=25,424 + -0,25*100= 0,424 1b) t=0: The Bank writes the put at 0,424 and takes a short position of 0,25 shares, sells the shares and deposits 25,424 in the bank. t=1: a. If the price goes up to 120 then he buys 0,25 shares @30 with the deposit in the bank which now has become 25,424*1,18=30 and then delivers the shares to close the short position. b. If the price goes down to 80 then he buys 0,25 shares @20 with the deposit in the bank and pays the 10 to the owner of the put and then delivers the shares to close the short position....
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This note was uploaded on 11/12/2009 for the course ECON hag taught by Professor Gunnar during the Fall '09 term at Uni. Iceland.

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Midterm - Hagfraeði og staerðfraeði fjármálamarkaða Lausnir við miðannarprófi 2008 1a put C=(K-S(1 i (1 0,18  1 120 =(90-120 = 0 ii

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