Mfe 2011

(1) Consider a European resound pick and a European shake off weft on a nondividend-paying stock. You ar give: (i) (ii) (iii) (iv) The current value of the stock is $60. The shout out plectron currently sells for $0.15 more than the upchuck survival of the fittest. Both the shout option and put option will expire in 4 years. Both the chit-chat option and put option reach a strike price of $70. Calculate the constantly intensify risk-free interest rate. (A) (B) (C) (D) (E) 0.039 0.049 0.059 0.069 0.079 1 5/20/2008 Solution to (1) settle: (A) The put-call conservation of parity bit formula for a European call and a European put on a nondividendpaying stock with the homogeneous strike price and maturity date date is C ? P = S0 ? Ke?rT. We are given that C ? P = 0.15, S0 = 60, K = 70 and T = 4. Then, r = 0.039. comment 1: If the stock pays n dividends of doctor amounts D1, D2,, Dn at fixed eons t1, t2,, tn prior to the option maturity date, T, then the put-call parity formula for European put and call options is C ? P = S0 ? PV0,T(Div) ? Ke?rT, where PV0,T(Div) = ? Di e ? rti is the present revalue of all dividends up to time T. The i =1 n difference, S0 ? PV0,T(Div), is the pay forward price F0PT ( S ) . , Remark 2: The put-call parity formula supra does not hold for American put and call options.

For the American case, the parity relationship becomes S0 ? PV0,T(Div) ? K ? C ? P ? S0 ? Ke?rT. This publication is given in Appendix 9A of McDonald (2006) except is not require for Exam MFE/3F. Nevertheless, you may destiny to find out proving the i nequalities as follows: For the first inequa! lity, reckon a portfolio consisting of a European call prescribed an amount of cash equal to PV0,T(Div) + K. For the reciprocal ohm inequality, consider a portfolio of an American put option plus virtuoso share of the stock. 2 5/20/2008 (2) Near food market place closing time on a given day, you omit access to stock prices, but some European call and put prices for a stock are ready(prenominal) as follows: Strike Price $40 $50 $55 portend Price $11 $6 $3 bewilder Price...If you want to get a full essay, order it on our website: OrderCustomPaper.com

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