Assign3 - STAT/ACTSC 446/846 Assignment #3 (due November 9,...

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STAT/ACTSC 446/846 Assignment #3 (due November 9, 2007) Note: When handing in your assignment, please use a cover page showing only your UWID number and section (lecture) number. Please write your name on the first actual page of your assignment. ACTSC/STAT 846 students: please indicate on the cover page that you are a graduate student by writing “846”. Recall that assignments must be handed in at MC 6028 before 3pm. If you want to use Excel for some of the problems (e.g., (4) and (5)), you are welcome to do so. In that case, hand in a copy of your spreadsheet and explain which approach/formulas you used. (1) (This is a variant on Exercise 5.5 of Financial Economics (FE).) A one-period arbitrage-free model has two assets with the following price evolution: for asset 1, S 1 (0) = 10 . 8 and S 1 (1 , ω 1 ) = 12, while S 1 (1 , ω 2 ) = 8; for asset 2, S 2 (0) = 10 and S 2 (1 , ω 1 ) = a , where a > 0 is a constant to be determined, while S 2 (1 , ω 2 ) = 3. In addition, you are told that a call option on asset 1 with a strike price of 9 has a price of 2.1. a) Compute the state-price vector implicit in this model and determine a . b) Show that the implied interest rate for this model is 0 (hint: construct a riskless portfolio whose payoff is always 1 and find its time 0 value). c) Determine the risk-neutral probabilities for this model. d) The price of a call option on asset 2 is 2.8. What is the strike price of this option? (2) Assume
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This note was uploaded on 03/02/2011 for the course ACTSC 446 taught by Professor Adam during the Fall '09 term at Waterloo.

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Assign3 - STAT/ACTSC 446/846 Assignment #3 (due November 9,...

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