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Unformatted text preview: 1) a.The initial investment equals to (800+7545=)770. This position yields $815 after one year and so the rate of return is 0.05844. b. In a), we have to pay more that the riskfree rate so we are in risk less position. And the arbitrage implied is that we should first borrow the money at 5% and then buy the position stated by a). As a result, we yield a sure return at 0.68%. c. From the above calculation, the initial investment would be $775.25 and the yield would be $815 one year later with the riskless rate of 5%. So the difference between the call and put prices that would eliminate arbitrage is $24.748. d. By using the method of c), we can see that for $780, the difference is $58.04105; for $800, it is $39.01646; for $820, it is $19.99187; and for $840, it is 0.967283. 2) a.By using the putcall parity for the currency options which is: + P (K, T ) = − e − rf T x + C (K, T ) + e − rT K = − e − .01 0.009 + 0.0006 + e − .05 0.009 = − .00891045 + 0.0006 +0.00856106 =0.00025 b. The option price is higher than expected, so we sell the put option and create a long put option synthetically to offset the risk perfectly. The following demonstrates the arbitrage process....
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This note was uploaded on 04/26/2010 for the course FIN FIN4160 taught by Professor Prof.chow during the Spring '09 term at CUHK.
 Spring '09
 Prof.Chow
 Arbitrage

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