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ADMS4503-Assignment2-Sample2 - AP/ADMS4503 3.0 AP/ADMS4503...

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AP/ADMS4503 3.0 Assignment #2 Page 1 AP/ADMS4503 3.0 Derivative Securities Winter 2010 Assignment #2 Instructions: (1) This assignment is to be done individually . You must sign and submit the standard cover page supplied as the last page of this assignment. (2) This assignment is due in the last class . (3) The work can be typed or handwritten . If it is handwritten and too difficult to read due to messiness and poor handwriting, it will receive zero credit . (4) You must show all details to receive full credit . (5) This assignment contains 5 questions and carries a total of 30 points . Question 1 (5 marks) GS stock sells at $156 and is expected to pay a $0.35 dividend in 3, 6 and 9 months. The 175-strike 1-year call option on GS costs $10.25. The risk-free rate is 4% p.a. continuously compounded. (a) What is the price of the 175-strike 1-year put option on GS? (2 marks) (b) Actually, the market put price is $24.32. Show how you should undertake this arbitrage. Show all the details. (3 marks) Question 2 (7 marks)
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