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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
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
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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