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Deriv - Problem Set 2 Derivatives Problem 1 C(S,X,t B(X,t =...

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3/8/11 1 Problem Set 2 Derivatives Problem 1 C(S,X,t) + B(X,t) = S + P(S,X,t) $12 + $86 $95 + $2.50 $98 $97.50 Profit = 50 cents
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3/8/11 2 Problem 2 C(S,X,t) + B(X,t) = S + P(S,X,t) $11 + $42.70 $50 + $3 $53.70 $53 Build a Box! $2 + $47.44 $50 + $5 $49.44 $55 So, what comes from building the box? Problem 2 Initially: $55–$49. 44 –$53 + $53. 70 = $6. 26 At expiration you will pay $5 (option portion) and receive $5 (bond portion) so net zero S 50 45 $45–$50 = –$5 Profit: $6. 26
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3/8/11 3 Problem 3 C(S,X,t) + B(X,t) = S + P(S,X,t) $14. 50 + $80. 75 $91. 50 + $3. 75 $95. 25 $95. 25 Use a box to borrow $11. 875 + $85. 50 $91. 50 + $5. 875 $97. 375 $97. 375 So, what comes from building the box? Problem 3 S 90 85 Initially: $5. 875 – $11. 875 + $14. 50 – $3. 75 = $4. 75 $85–$90 = –$5 At expiration you will pay $5 no matter what Borrow at T-bill rate
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3/8/11 4 Problems 4, 5, 6, 7 Keys for using OPT as an analytical tool C(S,X,t) = S - B(X,t) + P(S,X,t) Stock Call B(X,t) S C X C t C C σ R C P P P P P
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3/8/11 5 Problem 8 New York $10 buys a put to sell £120 in exchange for $200 (exchange at the forward rate) London £5.58 buys a call to buy $200 in exchange for £120 (exchange at the forward
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