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 riskfree 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.
 Winter '09
 Adam

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