Problem Set Arbitrage Bounds, Put Call Parity,
and Early Exercise
1. Put Call Parity
(a) The continuously-compounded risk free rate per annum is 20% per year. European call options
on the stock of XYZ CORP with an exercise price of $35 and a maturity date
Problem Set Forwards and Futures
1. Suppose that you enter into a six-month forward contract on a non-dividend-paying stock when the
stock price is $30 and the risk-free interest rate (with continuous compounding) is 12% per annum.
What is the forward pri
Solution for Review & Introductory Material
1. First, a plot of natural log and ex
The natural logarithm ln(x) is the logarithm having base e,
Solution for Arbitrage Bounds, Put Call Parity, and
Early Exercise Problem Set
(a) Put Call Parity for European options on a non-dividend paying stock:
S = c(K) + KerT p(K).
The payoff from the stock is equivalent to the payoff from a strategy of buyin
Solution for Payoff Diagram Problem Set
What is the difference between a long forward position and a short forward position?
With a long forward position, you are obligated to buy in the future at a pre-determined price.
With a short forward