Question: Problem 5 (a) Show that the approximate formula 0282 (C) 1+ 2 O(C) ~0. connecting the I(C) and the O(C) of plain vanilla European options

Problem 5 (a) Show that the approximate formula

Problem 5 (a) Show that the approximate formula 0282 (C) 1+ 2 O(C) ~0. connecting the I(C) and the O(C) of plain vanilla European options is exact if the underlying asset pays no dividends and if the risk-free interest rates are zero. In other words: 0252 1+ 2 T(C) O(C) 0 (b) If ra = 0 and r + 0, show that 02S2 I(C) 1+ 2 O(C) = 1 N'(d2) 2rVT-t N(d2) o 1+ Hint: N'(t) = V2 th 2 Problem 5 (a) Show that the approximate formula 0282 (C) 1+ 2 O(C) ~0. connecting the I(C) and the O(C) of plain vanilla European options is exact if the underlying asset pays no dividends and if the risk-free interest rates are zero. In other words: 0252 1+ 2 T(C) O(C) 0 (b) If ra = 0 and r + 0, show that 02S2 I(C) 1+ 2 O(C) = 1 N'(d2) 2rVT-t N(d2) o 1+ Hint: N'(t) = V2 th 2

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