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175E1.2010

175E1.2010 - THE UNIVERSITY OF IOWA 22S.175 Exam 1 Monday...

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THE UNIVERSITY OF IOWA 22S.175 Exam 1 Monday February 22, 2010 6:30 – 8:30 PM 106 GLH Write legibly. Show your steps. Explain your reasoning. Simplify your answers. Each question is worth 10 points. Total = 100 points. 1. The risk-free interest rate is constant through time. The time-0 price for a 2-year 105-strike European call option on a dividend-paying stock is 4. The time-0 price for a 2-year 105-strike European put option on the same stock is 6. The time-0 forward price for a forward contract that delivers one share of the stock at time 2 is 100. Determine the continuously compounded risk-free interest rate. 2. A one-period securities market model is given by S (0) = [1 1 1], S (1, Ω ) = 21 . 6 0 00 . 8 001 . 5 x . (The j-th column of the matrix gives the j-th security’s prices in the three states of nature at time 1. The securities pay no dividends.) Determine the range of values for x so that this model is arbitrage free.

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175E1.2010 - THE UNIVERSITY OF IOWA 22S.175 Exam 1 Monday...

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