Practice%204%20ans0 - 8 Slides for students of FNCE305...

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1 Slides for students of FNCE305 only. All Rights Reserved. Prof. Tu Jun©2010 Answers to Practice Questions and Problems 4 Answers to Practice Questions and Problems 4
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2 Slides for students of FNCE305 only. All Rights Reserved. Prof. Tu Jun©2010
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3 Slides for students of FNCE305 only. All Rights Reserved. Prof. Tu Jun©2010
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4 Slides for students of FNCE305 only. All Rights Reserved. Prof. Tu Jun©2010
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5 Slides for students of FNCE305 only. All Rights Reserved. Prof. Tu Jun©2010
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6 Slides for students of FNCE305 only. All Rights Reserved. Prof. Tu Jun©2010
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7 Slides for students of FNCE305 only. All Rights Reserved. Prof. Tu Jun©2010 Replicating Portfolio In General -- Put Assumption: In a 1-period and 2-state model, the stock can only take two values next period: S S u S d P P u P d The RP satisfies u d (1+ u)S×Δ + (1+ r)×B = P , (1+ d)S×Δ + (1+ r)×B = P , (in up-state) (in down-state) d u - (1 + u)P - (1 + d)P Δ = , = ( - ) (u - d)(1 + r) u d P P B S u d
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Unformatted text preview: 8 Slides for students of FNCE305 only. All Rights Reserved. Prof. Tu Jun©2010 Valuation by Replicating Portfolio -- put Example A: S = 100, r = 1%, X = 100, S u = 120, S u = 80 (u = 20%, d = -20%) S = 100 120 80 P = ? P u = 0 P d = 20 0- 20 Δ = = - 0.50 100 (20% + 20%)-= ( - ) u d P P S u d 1.2 ( × 1+ 20 u) - (- 0.8×0 B = = = 59.4059 0. 1 4 + × d) ( -(1+ )(1+ 1%) ) d u P P u d r = - 0.5×100 + 59.4 =Δ + .41 × 1 = 9 P S B 9 Slides for students of FNCE305 only. All Rights Reserved. Prof. Tu Jun©2010 Risk-neutral Valuation -- put Example A: S = 20, S ↑ 24 (u = 20%) or ↓ 19 (d = - 5%) in 6-month; X = 22, r = 4% (6-months simple rate). P = ? S = 20 24 19 p 1 - p P = ? 3 Step 1: Find the risk-neutral probability, p = 0.36 Step 2: Find the expected payoff p×0 + (1- p)×3 =1.92 Step 3: Discount the expected payoff 0.36×0 + (1- 0.36)×3 1.92 = =1.846 1+ 4% = 1+ P r Or 22 = + ( ) - = 0.6923+ - 20 = 1+ 1.846 P C PV X S r...
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This note was uploaded on 04/14/2010 for the course FINANCE fnce 305 taught by Professor Proftujun during the Spring '10 term at Singapore Management.

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Practice%204%20ans0 - 8 Slides for students of FNCE305...

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