FBE459_Homework4(1)

FBE459_Homework4(1) - USC Marshall School of Business FBE...

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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 3-month periods it is expected to go up by 10% or down by 10%. The risk-free rate is 12% per annum with continuous compounding. . A) What is the value of a 6-month 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 6-months at the highest observed price up until then. What is the value of this option? 2. A new Equity-Linked Note developed by a bank guarantees that investors will receive a return during a 6-month 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 risk-free 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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FBE459_Homework4(1) - USC Marshall School of Business FBE...

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