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Derivative Securities, Fall 2007 – Homework 5.
Distributed 10/31/07, due 11/14/07.
Comments added 12/2/07.
(1) Some of the questions in this problem set ask you to price “an
option” (e.g. “an option on the average value of the stock” in 2b) without clearly specifying explicitly
the nature of the option. It should always be a call with strike 90. (2) Question 4 supplies redundant,
inconsistent data. Suggested ﬁx: ignore the information on a oneyear swap (the remaining data are
nonredundant).
A solution sheet to HW4 will be posted 11/8; a solution sheet to HW5 will be posted 11/29 (in view
of Thanksgiving); no late HW’s will be accepted once the solution sheet has been posted.
Please note that Derivative Securities ﬁnal exam will be Wednesday 12/19 at the usual class time
and place. Also: this class does not meet Wed 11/21 (the Wednesday before Thanksgiving), since
only Monday classes meet that day.
This problem set calls for a considerable amount of arithmetic. Students with experience in program
ming will probably ﬁnd it easiest to do some of the problems by writing short computer programs,
rather than doing all the arithmetic by hand.
1. Consider a Europeanstyle call option written on a dividend paying stock with a maturity of
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 Fall '11
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 Finance

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