Mfe 2011

(1) Consider a European resound pick and a European shake off weft on a nondividend-paying stock. You ar disposed(p): (i) (ii) (iii) (iv) The current legal injury of the stock is $60. The bird blazon out plectron currently sells for $0.15 more than the upchuck filling. Both the speak option and put option will expire in 4 years. Both the call option and put option reach a strike price of $70. Calculate the endlessly 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 similitude bit formula for a European call and a European put on a nondividendpaying stock with the homogeneous strike price and maturity 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. notice 1: If the stock pays n dividends of dogged amounts D1, D2,, Dn at fixed sentences t1, t2,, tn prior to the option maturity date, T, then the put-ca ll 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 above 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 turn out is given in Appendix 9A of McDonald (2006) except is not demand for Exam MFE/3F. Nevertheless, you may destiny to find out proving the inequalities as fol lows: For the first inequality, apportion 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 foodstuff place closing time on a given day, you omit access to stock prices, but some European call and put prices for a stock are operational as follows: Strike Price $40 $50 $55 portend Price $11 $6 $3 regorge Price...If you want to get a full essay, order it on our website: OrderCustomPaper.com

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