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HW5 - The risk free interest rate is 2 each month Harry...

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Econ 4751 HW 5 Due on Tuesday, 12/15/2009 Option and option pricing theory (cont’d) 1. (50 ’) Suppose Jake is going to travel in France in Four months, and he needs €100 at that time. The current exchange rate is €1=$1. Assume we know that the exchange rate goes either up or down by 5% each month, even though we can’t predict which even will happen exactly.
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Unformatted text preview: The risk free interest rate is 2% each month. Harry sells Zack an option to exchange €10 0 for $100 in four month at $5. Is the price correct? Can you take advantage of this price, and how? 2 . (50 ’ ) Carefully state and prove put-call parity....
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