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Unformatted text preview: ActSc 371: Assignment #4 Posted: November 25, 2005 Due: In class, December 5, 2005 (no electronic submission) Late Assignments Will Not Be Accepted Question 1 Nicole owns one share of General Motors stock, the current price of which is $80. She is very worried that the price of this stock will fall over the next six months and would like to purchase a six-month European put option on one GM share as insurance. She knows that purchasing a put option might be expensive, and is therefore considering selling a deep out-of-the-money call option in order to offset some of the cost of the put. Though this will limit her upside potential, she is perfectly happy making this sacrifice in order to protect herself from major losses. Nicole decides to purchase a six-month put with a strike price of $68 and sell a six-month call with a strike price of $110. The sixth-month spot rate is 8% (stated annually, compounded continuously) and the variance of the continuously compounded annual returns on GM stock is 0.16. Assumethe continuously compounded annual returns on GM stock is 0....
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This note was uploaded on 11/02/2011 for the course ACTSC 371 taught by Professor Wood during the Fall '08 term at Waterloo.
- Fall '08