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Practice%2040 - (1 d)S×Δ(1 r)×B = P(in up-state(in...

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1 Slides for students of FNCE305 only. All Rights Reserved. Prof. Tu Jun © 2010 Practice Questions and Problems 4 Practice Questions and Problems 4 For  For  practice purpose, will not be collected and graded. However, I strongly  practice purpose, will not be collected and graded. However, I strongly  recommend you to try these questions. The answers will be posted in a separate file. recommend you to try these questions. The answers will be posted in a separate file.
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2 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 ,
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Unformatted text preview: (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 3 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 What is the fair put price P? 4 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 Please use the risk-neutral valuation approach to calculate the fair put price P....
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