Consider two strategies, A and B, with the following payoff w.r.t. to the price S of...
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Consider two strategies, A and B, with the following payoff w.r.t. to the price S of a common underlying asset after lyr: Payoff 40 30 20 10 0 A Page 2 of 5 B 10 20 30 40 50 60 70 80 90 100 S Assume you can long these strategies (and receive their payoff) by paying the ask prices Pa/P (contd...) at time 0, and you can short them (and pay their payoff) by receiving the bid prices Ph/PB. Furthermore, assume the lyr effective borrowing rate is 4%, and the 1yr effective lending rate is 3%. (a) [10 points] Find no-arbitrage bounds for the bid & ask prices of the strategies (P/a, Pb/a). (b) [10 points] Find no-arbitrage bounds for the price difference Pa - Pg of the two strategies. Consider two strategies, A and B, with the following payoff w.r.t. to the price S of a common underlying asset after lyr: Payoff 40 30 20 10 0 A Page 2 of 5 B 10 20 30 40 50 60 70 80 90 100 S Assume you can long these strategies (and receive their payoff) by paying the ask prices Pa/P (contd...) at time 0, and you can short them (and pay their payoff) by receiving the bid prices Ph/PB. Furthermore, assume the lyr effective borrowing rate is 4%, and the 1yr effective lending rate is 3%. (a) [10 points] Find no-arbitrage bounds for the bid & ask prices of the strategies (P/a, Pb/a). (b) [10 points] Find no-arbitrage bounds for the price difference Pa - Pg of the two strategies.
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