Chapter12

# Chapter12 - Investment Science Chapter 12 Solutions to...

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

Investment Science Chapter 12 Solutions to Suggested Problems Dr. James A. Tzitzouris < > 12.1 The initial cost of the spread is nonnegative since C(K 1 ) ≥ C(K 2 ) for K 1 < K 2 (see 12.4). 12.2 Use the same portfolio as in the text: 1. buy one call 2. sell one put 3. lend an amount d K This will reproduce the payment of the stock, except that it will be short by an amount with present value D . Hence: C – P + dK = S – D . 12.3 Q = max { 0, S K }− max { 0, K S } K , = { S K 0 K , if S K 0 K S K , if S K } = S. 12.4 1. Assume K 2 > K 1 , and suppose to the contrary that C(K 2 ) > C(K 1 ) . Buy option 1 and sell option 2. Use option 1 to cover the obligations of option 2, since we have that max{0, S- K 1 } ≥ max{0, S- K 2 } for all S . Keep profit of C(K 2 ) – C(K 1 ) . 2. Assume K 2 > K 1 , and suppose to the contrary that K 2 K 1 < C(K 1 ) – C(K 2 ) . Buy option 2 and short option 1 to obtain K 2 K

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

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

{[ snackBarMessage ]}

### Page1 / 2

Chapter12 - Investment Science Chapter 12 Solutions to...

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

View Full Document
Ask a homework question - tutors are online