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FNCE 326: Options, Futures, and Other Derivatives
FNCE 326: Options, Futures, and Other Derivatives
FNCE 326: Options, Futures, and Other Derivatives
There are a total of four multi-part problems with point values shown; please show all
work and be clear about your solutions and final answers.
1. Three-month call options with strike prices of $30 and $40 cost $7 and $4,
respectively. Please answer the following in three numbered steps and explain
what happens for each step: (25 Pts Total)
a. What is the maximum profit per unit when a bull spread is created from
the calls? (9 Pts)
1.
2.
3.
b. What is the maximum loss per unit when a bull spread is created from the
calls? (8 Pts)
1.
2.
3.
c. At what terminal stock price, ST, does strategy produce a zero profit per
unit when a bull spread is created from the calls? (8 Pts)
1.
2.
3.
2. Consider an investor who buys a Put for $4 with a strike price of $60 and buys a
Call for $7 with a strike price of $60. Please answer the following: (15 Pts Total)
a. What kind of Strategy has the investor created and what does the investor
hope the stock will do? (5 Pts)
b. Show by two numbered, 3-step examples at what two terminal stock prices
the investors profit will equal exactly $0. Be sure to indicate in your
examples what happens to each option and calculate the profit. (10 Pts)
d. What is the value of the Call option under no-arbitrage valuation and riskneutral valuation? (17 Pts)
No-Arbitrage Valuation:
Risk-Neutral Valuation:
4. Consider an American Put option on a non-dividend paying stock where the stock
price is $20, the strike price is $30, the risk-free rate is 6% per annum with
continuous compounding, the volatility is 20% per annum, and the time to
maturity is 6-months. Calculate the price of the American Put option using a twostep binomial tree of equal time length. (30 Pts Total)
Calculate: u, d, and p for the two-step tree: (7 Pts)
Draw the Properly-labeled Tree with proper stock prices (leave unknown values
of f as a ?): (8 Pts)
Calculate the Price of the option (Please label your calculations by Node): (15
Pts)