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Unformatted text preview: year. What is the the correct price of a one year European put option with the same strike price? (b) (13 points) What is a general formula for a lower bound on the price of a put with strike price K, maturity T, and riskfree rate r? Give an arbitrage argument to prove this lower bound. (c) ( 6 points) What is the correct lower bound for the price of the put in the case where the stock gives dividends of total present value D? . 3 4. (10 points) The riskfree interest rate is 10% with quarterly compounding. What is the equivalent rate for continuous compounding. 4 5. (15 points)The riskfree rates (with continuous compounding) for deposits are 5% for 6 months, 6% for one year, and 7% for 18 months. What is the theoretical price today of a bond with 100 dollar par value that gives coupons semiannually at annual rate of $8 ? Assume the bond matures in 18 months. 5 6. (10 points) The one year zero rate is 5%. The two year zero rate is 6%. What is the one year forward rate? 6...
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 Spring '11
 DonBlasius
 Math, k2, Rational pricing

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