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The Theory of Interest  Solutions Manual
154
Chapter 13
1.
Stock
Option
(
a
)
84 80
0 2
5%
100%
80
2
−−
=+
=−
(
b
)
80 80
0 2
0%
100%
80
2
==
−
(
c
)
78 80
2 2
2.5%
0%
80
2
=
(
d
)
76 80
4 2
5%
100%
80
2
(
e
) $78, from part (
c
) above
(
f
)
20$
2
TVP
P
IVP
=−=
2. (
a
)
100 98
$2
IVC
S
E
=−= − =
(
b
)
62$
4
T
V
CCI
V
C
(
c
)
$0
since
IVP
S
E
=≥
(
d
)
2
TVP
P
IVP
3.
Profit position =
−
Cost of $40 call + Cost of $45 call
+ Value of $40 call
−
Value of $45 call
(
a
)
3100 $
2
−++ − =−
(
b
)
2
(
c
)
312
.
5
00 $
.
5
0
−++
− =
(
d
)
3150$
3
−++ − =
(
e
)
311
05$
3
4.
See answers to the Exercises on p. 623.
5. (
a
) Breakeven
stock prices =
ECP
+
+
and
.
−
−
(
b
) Largest amount of loss =
CP
+
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View Full DocumentThe Theory of Interest  Solutions Manual
Chapter 13
155
6. (
a
) The shorterterm option should sell for a lower price than the longerterm option.
Thus, sell one $5 option and buy one $4 option. Adjust position in 6 months.
(
b
) If
50
S
≤
in 6 months, profit is:
$1 if
48
S
=
in one year.
$1 if
50
S
=
in one year.
$3 if
52
S
=
in one year.
If
50
S
>
is 6 months, profit is:
$3 if
48
S
=
in one year.
$1 if
50
S
=
in one year.
$1 if
52
S
=
in one year.
7.
See answers to the Exercises on p. 623.
8.
P
increases as
S
decreases, the opposite of calls.
P
increases as
E
increases, the opposite of calls.
P
increases at
t
increases, since longerterm options are more valuable than shorter
term options.
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 Spring '10
 Dr.K

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