174mt2 - Math 174 Midterm 2 March 2 2011 Do the following problems Show all your work Partial credit will be given only for exhibited work Good

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Math 174 Midterm 2 March 2, 2011 Do the following problems. Show all your work. Partial credit will be given only for exhibited work. Good Luck! 1. (10 points). Derive the formula for the risk neutral measure on a one step binomial tree, explaining carefully any ideas you use. 1
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next two three-month periods it is expected to increase or decrease by 10%. Consider a six month European put. Suppose the strike price K of the put is $95 and the risk-free interest rate is 8% per annum. (a) (7 points) Compute the risk neutral measure for the associated binomial tree. Use this computation to answer the following ques- tions. (b) (5 points) What is the value of the option at t = 0? (c) (5 points) Suppose the option is a call instead. What is its value at t = 0? (d) (5 points) What is the implied volatility (per annum) using the Cox, Ross, Rubinstein scheme? (e) (3 points) Suppose the put is American. What is its value and
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This note was uploaded on 01/30/2012 for the course MATH 174 taught by Professor Donblasius during the Spring '11 term at UCLA.

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174mt2 - Math 174 Midterm 2 March 2 2011 Do the following problems Show all your work Partial credit will be given only for exhibited work Good

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