Unformatted text preview: ce of 0.4 for a put with strike 33
consistent with put-call parity. 206 CHAPTER 6. MATHEMATICAL FINANCE 6.25. On December 20, 2011, stock in Exxon Mobil was selling at 81.63. (a) Use
the Black-Scholes formula to compute the value of an April 12 call (t = 0.3123
years) with strike 70, assuming an interest rate of r = 0.01 and the volatility
= 0.26. The volatility here has been chosen to make the price consistent with
the bid-ask spread of (12.6,12.7). (b) Is the price of 1.43 for a put with strike
70 consistent with put-call parity. Appendix A Review of Probability
Here we will review some of the basic facts usually taught in a ﬁrst course in
probability, concentrating on the ones that are important in the book. A.1 Probabilities, Independence The term experiment is used to refer to any process whose outcome is not
known in advance. Two simple experiments are ﬂip a coin, and roll a die. The
sample space associated with an experiment is the set of all possible outcomes.
The sample space is us...
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