a3 - ActSc 446/846 Winter 2006 Assignment 3 Due Date March...

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ActSc 446/846 Winter 2006 Assignment 3 Due Date: March 2,2006, 5 pm 1. The price of a European call that expires in six months and has a strike price of $30 is $2. The underlying stock price is 29$, and a dividend of $0.50 is expected in two months and again in five months. The term structure is flat, with all risk-free interest rates being 10%. What is the price of a European put option that expires in six months and has a strike price of $30? 2. Complete Example 4.2.2 in Chapter 1 of class note. 3. Suppose that c 1 ,c 2 and c 3 are the prices of European call options with strike prices K 1 ,K 2 , and K 3 , respectively, where K 3 > K 2 > K 1 and K 3 - K 2 = K 2 - K 1 . All options have the same maturity. Show that c 2 c 1 + c 3 2 (Hint: Consider a portfolio that is long one option with strike price K 1 , long one option with strike price K 3 , and short two options with strike price K 2 .) 4. Assume C,P denote the American call and American put option ’s current value on a un- derlying with dividend, maturity
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This note was uploaded on 11/02/2011 for the course ACTSC 446 taught by Professor Adam during the Winter '09 term at Waterloo.

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