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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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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
Use a box to borrow
$11.
875
+ $85.
50
$91.
50
+ $5.
875
$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 Tbill rate
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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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This note was uploaded on 04/15/2011 for the course FINA 4500 taught by Professor Staff during the Spring '08 term at North Texas.
 Spring '08
 staff
 Derivatives

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