Cornell University Fall 2010 Economics 3330: Problem Set 9 Due 11/23/10 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. 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. 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 one year until maturity costs $10. You have $10,000 to invest. The three portfolios you are considering are: 1) purchase 1,000 puts, 2) purchase 100 put options and use the rest of your funds to buy Treasuries that would pay 1% next year, and 3) short 100 shares of stock without receiving a rebate but being able to use your cash to buy 1% Treasuries. Complete the following chart with the value of the portfolio.
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