Midterm_2007 - Hagfraeði og staerðfraeði...

Info iconThis preview shows pages 1–2. Sign up to view the full content.

View Full Document Right Arrow Icon

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

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

Unformatted text preview: Hagfraeði og staerðfraeði fjármálamarkaða 04.07.50 Midterm 2007, Oktober 31st, 16:00 1. Consider the single-period CRR model in which the price of the stock today is S (0) = 100 . In the next period it can go up to 120 , or go down to 80 , with probabilities 80% and 20% respectivly. The risk free rate is R = 5% and let K = 90 a) How many shares of the stock should you buy to replicate the payoff of a put option, C = ( K- S (1)) + b) What is the arbitrage free price of the put? 2. Assume that the stock does not pay dividends. a) Prove using a no-arbitrage argument that the value of a European call plus the present value of K in the bankacount is equal to the value of the European put: c ( t ) + Ke- r ( T- t ) = p ( t ) + S ( t ) b) Let the strike price be equal to the stock price at time t = 0 , K = S (0) , and assume that the European put and call have the same value, p (0) = c (0) . If the American Put is worth 10 , P (0) = 10 , what is the value of the American Call, C (0) =? Why?Why?...
View Full Document

Page1 / 2

Midterm_2007 - Hagfraeði og staerðfraeði...

This preview shows document pages 1 - 2. Sign up to view the full document.

View Full Document Right Arrow Icon
Ask a homework question - tutors are online