Topic 11 Nonlinear Derivatives Assignment.docx 1. Consider an asset with a current spot price of $50. You buy a one year 10% out of the money call on the asset with a premium of $3. You also buy a one year 10% out of the money put on the asset with a premium of $4. Draw the payoff diagram for this structure (the call combined with the put). At what price(s) will you breakeven after accounting for the premium? 2. Consider an asset with a current spot price of $50. You sell a one year 10% out of the money call on the asset with a premium of $3. You also buy a one year buy a 10% out of the money put on the asset with a premium of $4. Draw the payoff diagram for this structure (the call combined with the put). At what prices will you breakeven after accounting for the premium? 3. Repeat the analysis of the last slide (slide 16 titled "Try The Formula") for a call with a strike of $110 SO = $100 -10% u=2 d=1/2=0.5 What is the premium? Try the problem using the risk neutral probability; also try the problem using delta and B. 4. Repeat the analysis of the last slide for a put with a strike of SLO SO = $100 -10% u=2d=1/2=0.5 What is the premium? Try the problem using the risk neutral probability; also try the problem using delta and B. 5. Repeat the calculation for another set of parameters. SO = $100 -10% u=3/21.5 d-2/3 What is the premium on a 10% out of the money call? If the spot price is $100 then the strike on the call is S110. (1 + 10%). S100-110% S100 = $110 Topic 11 Nonlinear Derivatives Assignment.docx 1. Consider an asset with a current spot price of $50. You buy a one year 10% out of the money call on the asset with a premium of $3. You also buy a one year 10% out of the money put on the asset with a premium of $4. Draw the payoff diagram for this structure (the call combined with the put). At what price(s) will you breakeven after accounting for the premium? 2. Consider an asset with a current spot price of $50. You sell a one year 10% out of the money call on the asset with a premium of $3. You also buy a one year buy a 10% out of the money put on the asset with a premium of $4. Draw the payoff diagram for this structure (the call combined with the put). At what prices will you breakeven after accounting for the premium? 3. Repeat the analysis of the last slide (slide 16 titled "Try The Formula") for a call with a strike of $110 SO = $100 -10% u=2 d=1/2=0.5 What is the premium? Try the problem using the risk neutral probability; also try the problem using delta and B. 4. Repeat the analysis of the last slide for a put with a strike of SLO SO = $100 -10% u=2d=1/2=0.5 What is the premium? Try the problem using the risk neutral probability; also try the problem using delta and B. 5. Repeat the calculation for another set of parameters. SO = $100 -10% u=3/21.5 d-2/3 What is the premium on a 10% out of the money call? If the spot price is $100 then the strike on the call is S110. (1 + 10%). S100-110% S100 = $110