WEEK 12
M. Reindorp
The four questions below evoke be used to improve your final grade for 1CM22, as expound in the grading section of the study guide. In general, delight show calculations for your answers. Some questions describe further specific requirements. You can work in groups (maximum four students each). Please show the find and student ID of all group members on the first rapscallion of your answers. This assignment is due by 12.00 (midday) on 18-05-2011. Please stash away your answers in Paviljoen F0.16.
1. (a) Suppose there is a European instal together pick on derivation X with due date in one year and current scathe €10. A European call option on stock X with maturity in one year has current terms €15. both options have commit harm €40. The price of stock X itself is €50, and the price of a ( lay on the line free) discount bond (zero coupon bond) paying(a) €1 in one year is €0.90. How can you feature a risk free profit? (b) An American put option on stock Y with exercise price €50 has a time to maturity of one year. The price of stock Y is €0.10. The risk free interest prescribe is 5%. Show that it is optimal to exercise this option early. (c) Your blighter has an American call option on the stock of Akzo Nobel. The option has an exercise price of €55 and expires in 6 months.
The annualized six-month risk free interest rate is 10%. Currently, the price of Akzo Nobel stock is greater than €55, but it will go ex dividend tomorrow (i.e., anyone who acquires the stock after today will not be entitled to receive the dividend). The dividend will be €2. Your colleague wonders whether to exercise the option. He is worried, because he recalls from his undergraduate finance studies that the stock price of Akzo Nobel should drop tomorrow by €2, making it less possible that the stock price will be over €55 when his call option expires. Explain to your colleague (using a numeric argument) why he should not exercise the option.
2. The stock of the company MENIAC computers...If you want to get a full essay, order it on our website: Orderessay
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