ADMS4503 – Derivatives and Fixed Income Securities
Sample 1
YORK UNIVERSITY
Atkinson Faculty of Liberal and Professional Studies
DERIVATIVES AND FIXED INCOME SECURITIES
AK/ADMS 4503.03
FINAL EXAMINATION
Nabil Tahani
INSTRUCTIONS
1.
Allowed material: Textbook, lectures notes and a calculator.
2.
This examination contains
5 questions
on 5 pages (including this
cover page and the
Normal Distribution
table at the end) and carries
a
total mark of 40 points
.
3.
Answer all questions in the examination booklet provided.
4.
If you have to make any assumptions, state them clearly. Unrealistic
assumptions, or those inconsistent with the information provided in
the question, will not be accepted.
5.
You must show all your work, including formulas and details, in order to
receive full credit.
Final Examination
1
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View Full DocumentADMS4503 – Derivatives and Fixed Income Securities
Sample 1
Question 1
(10 marks)
A stock selling at $85 is expected to pay a dividend of $3 in three months and has a
volatility of 30%. Consider call and put options with a 6month maturity and an $80
strike price. The riskfree rate is 5% per annum continuously compounded.
Consider a threestep binomial tree.
(a) Calculate the parameters of the binomial tree:
u
,
d
,
a
(i.e. growth factor) and
p
(riskneutral probability) by matching the volatility.
(2 marks)
(b) Use the binomial tree to price the put option if it is European.
(3 marks)
(c) Without using a Binomial tree, what is the price of the corresponding
European Call?
(2 marks)
(d) Use the binomial tree to price the put option if it is American.
(3 marks)
Question 2
(8 marks)
A Europeanstyle Barrier call option pays off
)
80
,
0
max(
−
T
S
in one year’s time if the
terminal stock price in one year is less (and not equal) than $100
. The stock
spot price is $90, its volatility is 20% and it pays no dividend. The riskfree rate is
3% per annum continuously compounded. Consider a fourstep binomial tree.
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 Fall '10
 Nabil
 Strike price

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