Tuesday

July 29, 2014

July 29, 2014

Posted by **Anonymous** on Tuesday, October 16, 2012 at 4:15pm.

and that the interest rate (continuously compounding, annualized) is 10%.

(1) p(90) = 4; p(100) = 9 1/8 ; p(110) = 16; p(120) = 25 3/4

(2) p(90) = 2 ¾ ; p(100) = 81/2 ; p(110) = 17; p(120) = 24

For each set of prices, please answer the following questions:

(a) Assume that the stock will not pay any dividend in the next 6 months. Do

these prices satisfy arbitrage restrictions on options values? If yes, prove it. If

not, construct an arbitrage portfolio to realize riskless pro_ts and show how that

portfolio performs whatever the underlying price does

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