EP PRIN.OF MICROECONOMICS-MYLAB ACCESS
13th Edition
ISBN: 9780135197103
Author: CASE
Publisher: PEARSON CO
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Chapter 16, Problem 2.4P
To determine
The potential level of output and the
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Answer these questions using replication or the risk neutral probability. Both methods will
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6. What is the premium of a call with a higher strike.
Show your work to receive credit; do not round intermediate calculations.
S0 = $100, u=2, d=0.5, r=10%, strike=$150
Answer these questions using replication or the risk neutral probability. Both methods will produce the same answer.
Problem 2:
At a raffle, 2000 tickets are sold at $5 each for five prizes of $2000, $1000, $500, $250, and $100. You
buy one ticket. What is the expected value of your gain?
1. Find the gain for each prize.
2. Write a probability distribution for the possible gains.
3. Find the expected value.
4. Interpret the results.
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