midterm1_fall10 - I. Multiple Choice Questions: (14 points)...

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I. Multiple Choice Questions: (14 points) 1. What’s the value of an American put option using the two-period binomial option pricing model? The parameters are S=62, X=65, r=0.08,u=1.10, and d=0.95. No dividend. (7 points) A. 0.58 B. 1.16 C. 3 D. 2.25 2. On December 9 of a particular year, a January Swiss Franc call option with an exercise price of 46 had a price of 1.63. The spot rate was 47.28. All prices in cents per Swiss Franc. The option expired on January 13. The US risk-free rate was 7.1 percent, while the Swiss risk-free rate was 3.6 percent. What’s the intrinsic value and time value of the call? (7 points) A. 1.42, 0.14 B. 1.28, 0.35 C. 1.28, 2.91 D. 1.42, 2.70 II. Short answer questions: (86 points) 1. Suppose that the current stock price is $115, the exercise price is $116, the annually compounded interest rate is 5 percent, the stock pays a $1.5 dividend in the next instant, and the quoted call price $2.5 for a one year option. Identify the appropriate arbitrage opportunity and show the appropriate arbitrage strategy. (31 points) The most likely arbitrage opportunity is a violation of a lower boundary condition. With dividends, the lower boundary for a call is expressed as: (3 points) Note that the present value of the dividend is D, because the dividend is paid in an instant. Because the lower boundary is higher than the quoted call price of $2.5, there is an arbitrage opportunity. One method
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This note was uploaded on 06/06/2011 for the course FINA 4320 taught by Professor Mckeon during the Spring '08 term at University of Georgia Athens.

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midterm1_fall10 - I. Multiple Choice Questions: (14 points)...

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