In a financial market a stock is traded with a current price of 50. Next period the price of the stock can either go up with 30 per cent or go down with 25 per cent. Risk-free debt is available with an interest rate of 8 per cent. Also traded are European options on the stock with an exercise price of 45 and a time to maturity of 1, i.e. they mature next period. a) Find prices of Arrow-Debreu securities. b) Calculate the price of a call option by constructing and pricing a replicating portfolio. c) Calculate the price of a put option by RNVR. d) Does put-call parity hold? Explain.
In a financial market a stock is traded with a current price of 50. Next period the price of the stock can either go up with 30 per cent or go down with 25 per cent. Risk-free debt is available with an interest rate of 8 per cent. Also traded are European options on the stock with an exercise price of 45 and a time to maturity of 1, i.e. they mature next period. a) Find prices of Arrow-Debreu securities. b) Calculate the price of a call option by constructing and pricing a replicating portfolio. c) Calculate the price of a put option by RNVR. d) Does put-call parity hold? Explain.
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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ANSWER C AND D PLEASE ONLY
In a financial market a stock is traded with a current price of 50. Next period the price
of the stock can either go up with 30 per cent or go down with 25 per cent. Risk-free
debt is available with an interest rate of 8 per cent. Also traded are European options
on the stock with an exercise price of 45 and a time to maturity of 1, i.e. they mature
next period.
a) Find prices of Arrow-Debreu securities.
b) Calculate the price of a call option by constructing and pricing a
replicating portfolio.
c) Calculate the price of a put option by RNVR.
d) Does put-call parity hold? Explain.
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