Assignment3_PartI_solution - The Johnson School at Cornell...

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Professor 1. Notati (a) In orde For examp However, the top in riskless pr (b) If the ݐ,ݐ and T 2. (a) We sh not exerc Let us ado in 3 mont exercising (Note tha beats out If we exer r George Ga ion: S = 90, C er to avoid ar ple, if the div arbitrage pro nequality is re rofit. dividend is $ T denote now ould not exer ise the put if opt the follow ths. We proce g at ݐ , imme t we are not any time bef rcise at t, the The Joh ao A (K = 80, τ = 0 rbitrage, the f idend is $1 pe 11 ൏ 90 ofits should b eversed. Thus 1 per share in w, 1 month fro rcise the put wing notation eed to show t diately after saying that ݐ fore the divid dividend we P hnson Scho ssignment .5) = 11, r = 8 following ineq er share in 1 0െ1∙݁ ି ଴.଴଼ ଵଶ be a sure thin , without kno n 1 month, w om now, and at any time b ܦ ି : t = today, ݐ hat exercisin the dividend. is the optim end date.) will lose is at Page 1 of 3 ool at Corn t 3 (Part I S 8%/yr, D is an quality should month, then െ80∙݁ ି଴.଴ g. In this case owing the exa e see that the 6 months fro before the ex ൐ܭെܭ⋅ܤ = ex
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This note was uploaded on 10/26/2010 for the course JOHNSON 6730 at Cornell University (Engineering School).

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Assignment3_PartI_solution - The Johnson School at Cornell...

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