1. Let So be the current stock price and r the continuously compounded interest rate. Using...

 

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1. Let So be the current stock price and r the continuously compounded interest rate. Using no arbitrage arguments, show that, when there is a continuously compounded dividend yield 6, the forward price is For = Soer-8)T 2. In the one-period binomial pricing derive A and B for the put price Po. (There is a replicating portfolio of A' share and a bond B'). 3. Let S $100, K=$95, r=8%, T=0.5, and 6=0. Let u=1.3, d=0.8 and n=1. (a) Find the price of a European call. (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? (d) What is the price of a European put with same strike price K and maturity. 4. Let S=8100, K=895, r=8%. T=1.5 years, and 6 = 0. Let u=1.3, d=0.8 and n=3. (a) Construct a binomial tree and find the price of an American Put option on the stock. (b) What is the price of the corresponding European Call and Put. (c) Does Put-Call Parity work for the American option? 1. Let So be the current stock price and r the continuously compounded interest rate. Using no arbitrage arguments, show that, when there is a continuously compounded dividend yield 6, the forward price is For = Soer-8)T 2. In the one-period binomial pricing derive A and B for the put price Po. (There is a replicating portfolio of A' share and a bond B'). 3. Let S $100, K=$95, r=8%, T=0.5, and 6=0. Let u=1.3, d=0.8 and n=1. (a) Find the price of a European call. (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? (d) What is the price of a European put with same strike price K and maturity. 4. Let S=8100, K=895, r=8%. T=1.5 years, and 6 = 0. Let u=1.3, d=0.8 and n=3. (a) Construct a binomial tree and find the price of an American Put option on the stock. (b) What is the price of the corresponding European Call and Put. (c) Does Put-Call Parity work for the American option?