# Answers2 - E C 3 7 F I N A N C I A L D E R I V A T I V E S...

This preview shows pages 1–2. Sign up to view the full content.

This preview has intentionally blurred sections. Sign up to view the full version.

View Full Document
This is the end of the preview. Sign up to access the rest of the document.

Unformatted text preview: E C 3 7 F I N A N C I A L D E R I V A T I V E S E x e r c i s e 2 1 . A s t o c k p r i c e i s c u r r e n t l y S = 4 . A t t h e e n d o f t h e m o n t h , i t w i l l b e e i t h e r S u 1 = 4 2 o r S d 1 = 3 8 . T h e r i s k- f r e e r a t e o f c o n t i n u o u s l y c o m p o u n d e d i n t e r e s t i s 8 % p e r a n n u m . W h a t i s t h e v a l u e c 1 | o f a o n e- m o n t h E u r o p e a n c a l l o p t i o n w i t h a s t r i k e p r i c e o f \$ 3 9 ? A n s w e r . T h e v a l u e o f a p o r t f o l i o d e p e n d s u p o n t h e p r i c e S 1 o f s t o c k , w h i c h w i l l b e e i t h e r S u 1 = 4 2 o r S d 1 = 3 8 a t t i m e t = 1 , w h i c h i s a t t h e e n d o f t h e m o n t h . I f S 1 = S u 1 = 4 2 , t h e n t h e c a l l o p t i o n w i l l b e w o r t h c u 1 | = 4 2 − 3 9 = 3 t o w h o e v e r i s h o l d i n g i t . I f S 1 = S d 1 = 3 8 , t h e n t h e c a l l o p t i o n w i l l b e w o r t h c d 1 | = . T h e v a l u e s o f t h e p o r t f o l i o i n e i t h e r c a s e a r e V 1 = ( S u 1 N − c u 1 | = 4 2 N − 3 , i f S 1 = S u 1 = 4 2 ; S d 1 N − c d 1 | = 3 8 N , i f S 1 = S d 1 = 3 8 . F o r t h e r i s k- f r e e p o r t f o l i o t h a t i s u s e d t o v a l u e t h e s t o c k o p t i o n , t h e s e t w o v a l u e s m u s t b e e q u a l : V 1 = 4 2 N − 3 = 3 8 N = ⇒ N = . 7 5 ....
View Full Document

## This note was uploaded on 03/02/2012 for the course EC 3070 taught by Professor D.s.g.pollock during the Spring '12 term at Queen Mary, University of London.

### Page1 / 6

Answers2 - E C 3 7 F I N A N C I A L D E R I V A T I V E S...

This preview shows document pages 1 - 2. Sign up to view the full document.

View Full Document
Ask a homework question - tutors are online