Sa Sb "up" 110 100 "down" 90 85 Let C(100) be the price of a European call option on stock A that expires in period 2 with the strike price 100. Let P(100) be the price of European put option on stock A that expires in period 2 with the strike price 100. (a) Solve for ro (b) Calculate C(100) - P(100)
Sa Sb "up" 110 100 "down" 90 85 Let C(100) be the price of a European call option on stock A that expires in period 2 with the strike price 100. Let P(100) be the price of European put option on stock A that expires in period 2 with the strike price 100. (a) Solve for ro (b) Calculate C(100) - P(100)
Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
Problem 1PS
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Question
Do answer both ASAP.
Transcribed Image Text:"up" "down"
90
Sa
110
S 100
85
Let C(100) be the price of a European call option on stock A that expires in
period 2 with the strike price 100.
Let P(100) be the price of European put option on stock A that expires in
period 2 with the strike price 100.
(a) Solve for ro
(b) Calculate C(100) - P(100)
Transcribed Image Text:Question 2
We consider an example of constructing a synthetic safe asset with two risky
assets. Suppose that there are two periods: 0, and 1. We consider stocks A
and B. Neither of the two stocks pay any dividend.
In period 0, the price of stock A is S = 99.5, the price of stock B is S 94.
The one-period risk-free rate in period 0 is denoted by ro.
In period 1, there are two states: “up" and "down". State "up" occurs with
probability 0.6; State "down" occurs with probability 0.4. The prices of the
two stocks in period 1 is given by the following table.
The one-period risk-free rate in period 1 ri is 5%.
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