Lecture 11 Tutorial Questions - Solutions.pdf

Problem 1525 in this case 0 95 s 0 95 k 0 05 r 0 04 f

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Problem 15.25 In this case 0 0 95 S   , 0 95 K , 0 05 r , 0 04 f r , 0 08 and 0 75 T   . The option can be valued using equation (15.8): 1 2 1 ln(0 95 0 95) (0 05 0 04 0 0064 2) 0 75 0 1429 0 08 0 75 0 08 0 75 0 0736 d d d       1 2 ( ) 0 5568 ( ) 0 5293 N d N d     The value of the call, c , is given by 0 04 0 75 0 05 0 75 0 95 0 0 5568 0 95 0 5293 0 0290 c e e                    i.e. it is 2.90 cents. From put call parity 0 f r T rT p S e c Ke so that 0 05 9 12 0 04 9 12 0 029 0 95 0 95 0 0221 p e e                 The option to buy USD 0.95 with CAD 1.00 is the same as an option to sell one Canadian dollar for USD 0.95. This means that it is a put option on the Canadian dollar and its price is USD 0.0221.
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