Problems
10.1
Let S = $100, K = $105, r = 8%, T = 0.5, and δ = 0 (i.e. no dividends). Let u = 1.3 and d = 0.8, and n = 1.
• a. What are the premium, ∆, and B for a European call?
• b. What are the premium, ∆, and B for a European put?
10.2
Let S = $100, K = $95, r = 8%, T = 0.5, and δ = 0 (i.e. no dividends). Let u = 1.3, d = 0.8, and n = 1.
• a. Verify that the price of a European call is $16.196.
• b. Suppose you observe a call price of $17. What is the arbitrage?
• c. Suppose you observe a call price of $15.50. What is the arbitrage?
10.3
Let S = $100, K = $95, r = 8%, T = 0.5, and δ = 0 (i.e. no dividends). Let u = 1.3, d = 0.8, and n = 1.
• a. Verify that the price of a European put is $7.471.
• b. Suppose you observe a put price of $8. What is the arbitrage?
• c. Suppose you observe a put price of $6. What is the aribtrage?
