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hw2 - UNIVERSITY OF ILLINOIS AT URBANA-CHAMPAIGN Actuarial...

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UNIVERSITY OF ILLINOIS AT URBANA-CHAMPAIGN Actuarial Science Program DEPARTMENT OF MATHEMATICS Math 476 / 567 Prof. Rick Gorvett Actuarial Risk Theory Fall, 2010 Homework Assignment # 2 (max. points = 10) Due at the beginning of class on Thursday, September 9, 2010 You are encouraged to work on these problems in groups of no more than 3 or 4. However, each student must hand in her/his own answer sheet. Please show your work – enough to show that you understand how to do the problem – and circle your final answer. Full credit can only be given if the answer and approach are appropriate. Please provide answers to two decimal places. Note: When calculating a percentage, please provide answers either as a proportion to four decimal places (e.g., 0.xxxx), or as a percentage to two decimal places (e.g., xx.xx%). (1) Consider a European 60-strike call option on one share of ABC stock. You believe that, on the expiration date of the option, the stock price is equally likely to be anywhere between $50 and $75 per share. What is the expected payoff of this call option?
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