Assignment+2-sol

Assignment+2-sol - Assignment 2 Problem 1. a) The expected...

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Assignment 2 Problem 1. a) The expected return rate of stock price should be equal to return rate of the bond: 1 005 . 0 100 100 ) 1 ( 90 110 = - - × + × p p , which gives p = 0.525 % 9378 . 9 5 . 100 75 . 99 75 . 99 475 . 0 ) 90 ( 525 . 0 ) 110 ( 5 . 100 475 . 0 90 525 . 0 110 2 2 2 = = = = × - + × - = = × + × = m s m m s m CV b) The option price is the expected value ( 29 2239 . 5 475 . 0 0 525 . 0 10 005 . 1 1 = × + × Problem 2. a) We have following two equations 5 . 0 2 1 005 . 0 100 100 ) 1 )( 100 ( ) 100 ( = - = - - - + + d dp p d p d and ( 29 [ ] 251 . 10 20 . 10 1 0 005 . 0 1 1 = = - + × + dp p p d Solving the two equations together, we have 5125 . 0 , 002 . 20 = = p d b) (10 *0.5125)/1.005 = 5.10 Problem 3. a) Every day s stock return rate should be equal to bond return, so 1 005 . 0 100 100 ) 1 ( 95 105 = - - × + × p p and hence p = 0.55 b) Over 20 days, if the stock goes up 10 days and goes down 10 days, the stock price will be $100 on 20 th day. So at least the stock price will go up for 11 days to win $50.
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Assignment+2-sol - Assignment 2 Problem 1. a) The expected...

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