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Tut2 - ACTSC/STAT 446/846 – Midterm#2 – Winter...

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Unformatted text preview: ACTSC/STAT 446/846 – Midterm #2 – Winter 2008 (Section 3 - Version A) Department of Statistics and Actuarial Science, University of Waterloo March 18, 2008 Name: Section: (Please write your UWID number on the back of this page only.) Duration: 50 minutes There are four questions for a total value of 40 points. 3 of 8 1. [11 points] Let S = 100. The time step is one month. In the absence of dividends, the stock is assumed to evolve as the following two period tree: 144 ր 120 ր ց 100 84 ց ր 70 ց 49 We assume the interest rate is r = 7% and a fixed dividend of 15$ is paid after one month. (a) Using a (two time-steps) binomial tree, give the price of an American call option with strike K = 65 and maturity 2 months. 4 of 8 (b) The bank sells this American call for a premium of 37$. Explain as precisely as possible the strategy of the bank that can generate some profit without taking any risks. How much does the bank receive at time T following this strategy? 5 of 8 2. [11 points] Consider a two-period binomial model with time-steps of size one year each. TheConsider a two-period binomial model with time-steps of size one year each....
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Tut2 - ACTSC/STAT 446/846 – Midterm#2 – Winter...

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