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Unformatted text preview: 07/08 Semester II THE UNIVERSITY OF HONG KONG DEPARTMENT OF STATISTICS AND ACTUARIAL SCIENCE STAT1802 Financial Mathematics Tutorial 10 April 25, 2008 1 Review 1.1 Basic Insurance strategies 1. Cap : buy a call to insure a short position against a higher price of an asset. 2. Floor : buy a put to insure a long position against a fall in the price of an asset. 1.2 Synthetic Forwards & Put-call Parity Two ways to receive S T at time T : (1) Buy a call option and sell a put option at time 0, and pay K at time T . (To create a synthetic forward contract.) (2) Enter a forward agreement to buy S T , and at time T pay F ,t , the price of the forward agreement. By the no-arbitrage principle, these two ways must cost the same. Discounting to time 0, this means Call ( K,t )- Put ( K,t ) + PV ( K ) = PV ( F ,t ) . By adjusting the equation, we have the call-put parity Call ( K,t )- Put ( K,t ) = PV ( F ,t- K ) ....
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This note was uploaded on 04/17/2011 for the course STAT 1802 taught by Professor Dr.k.c.yuen during the Spring '08 term at HKU.
- Spring '08