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##### Finance Options Homework Fall 2014

**Description**

solution

**Question**

Question;3. Draw a payoff diagram for each of the following portfolios:a. Buy a put X = $20, buy a call X = $30.b. Buy a put X = $50 (which costs $16.12), sell a put X = $45 (which costs $12.52), sell a put X = $40 (which costs $9.26), buy a put X = $30 (which costs $4.02). Draw the gross and net payoff diagram for this portfolio.4. A stock currently trades at $45, but may increase to $60 or fall to $35 over the next year. The risk-free rate is 5%. Using the binomial method, value a call option and a put option, both with X= $50. Then verify that the prices you obtained satisfy put/call parity. Suppose that the actual market price of the call option with X = $50 was $5. Demonstrate that you could engage in arbitrage to take advantage of this mispricing. You need to show the up-front profit and show that your position is risk-free over the year.5. A stock trades at $40. Over the next six months it could go up to $48 or down to $33. In the subsequent six-month period, if the stock starts at $48 it could go all the way to $60 or it could fall to $39. If the stock starts at $33, it could go up to $38 or it might fall to $27. Value a put option on this stock with X = $40 and a call option with X = $36. Assume an annual risk-free rate of 4%.

Paper#48389 | Written in 18-Jul-2015

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