3330 PS9 sol - Cornell University Fall 2010 Economics 3330:...

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Cornell University Fall 2010 Economics 3330: Problem Set 9 Solutions 1. True/False/Explain State whether each of the following is true or false and explain your answer. Please limit your explanations to no more than two sentences. a. It is never optimal to exercise an option before its expiration. False. Exercising a put option on a company with equity value of zero generates a time value exceeding the put value at expiration. b. An at-the-money call option must cost more than an at-the-money put option with the same maturity when the risk-free rate is positive. True. By put-call parity, C – P = S 0 - X/(1+r f ) T = S 0 - S 0 /(1+r f ) T > 0. 2. You are interested in establishing a short position in a company. The stock of the company currently costs $100. A put option with a strike price of 100 that has six months until maturity costs $10. You have $10,000 to invest. The three portfolios you are considering are: 1) purchase $10,000 of puts, and 2) purchase 100 put options and use the rest of your funds to buy Treasuries
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3330 PS9 sol - Cornell University Fall 2010 Economics 3330:...

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