Posted by **Anonymous** on Tuesday, October 16, 2012 at 4:21pm.

1. You are given the following two sets of prices of European options as a function of the strike price, for a stock with S = 100. Assume that all options mature in 6 months,

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.

(b) Would your answer to Part (a) change if these put options are Americans? Why?

(c) Would your answer to Part (a) change if the stock will pay an unknown amount

of dividend in 3 months? Explain why.

## Answer This Question

## Related Questions

- Finance - . You are given the following two sets of prices of European options ...
- economics - What are futures and options? What is the difference between ...
- Finance - 1. Determine the intrinsic values of the following call options when ...
- algebra - the size and diameter of your pizza the two options for number of ...
- Piecewise Function - The following questions I don't understand, could you ...
- Finance - A trader buys a European call option and sells a European put option. ...
- risk management - You are the risk manager of an energy producing company. Your...
- grammar - can you check these for me ? circle the action word that tells more. 1...
- AlgebraB - I have somemultiple choice questions that I need help with. Question ...
- maths - The number of vehicles entering each of 15 junctions from a motorway ...

More Related Questions