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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 threemonth 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 riskfree 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.
 Spring '11
 DonBlasius
 Math, Binomial

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