USC Marshall School of Business
FBE 459 – Financial Derivatives (Spring 2011)
Prof. Pedro Matos
Homework 4
(date due: Wednesday, April 27)
1. A stock price is currently $40. Over each of the next 3month periods it is expected to
go up by 10% or down by 10%. The riskfree rate is 12% per annum with continuous
compounding.
. A) What is the value of a 6month European put option with a strike price of $42? What
would be the extra value of an American put option with same strike price?
. C) You are considering buying a “Lookback put” which allows you to sell the stock in
6months at the highest observed price up until then. What is the value of this option?
2.
A new EquityLinked Note developed by a bank guarantees that investors will receive
a return during a 6month period that is the greater of (a) zero or (b) 40% of the return of
the S&P500 market index.
. A) Describe the payoff of this instrument in terms of the S&P500 index underlying, any
options on it and riskless bonds?
. B) Currently the riskfree rate is at 8% per annum, the dividend yield on the S&P500
index is 3% per annum, and the volatility of the index is 25% per annum. Is the product a
“fair” deal for the investor?
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 Spring '08
 Matos
 riskfree rate, Strike price

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