Timo Reichmann: Tutorial 3 FoF

Institute for Law and Finance

Fundamentals of Finance - Tutorial III

Winter Term 2023/2024

1. Put-Call-Parity

Assume that a European Call Option with one year to expiration and a strike
price of 88€ sells for 𝐶0 = 6 €. The current stock price is 𝑆0 = 85 €, and
the (discrete) risk-free interest rate is 5% p.a. What is the value of a European
Put with same strike and maturity using the Put-Call-Parity?

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 Timo Reichmann: Tutorial 3 FoF

2. One-Period Binomial Tree: Replication

Assume that each period, the non-dividend paying stock of “ILF-AG” can
either increase or fall by 10% in value, that is, 𝑢 = 1,1 , 𝑑 = 0,9. The initial
price of the stock is €25 per share and the (discrete) risk-free rate is 5% per
period. Compute the value of a European Call Option with a strike price of €25
and maturity in 1 period, using a replication strategy.

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 Timo Reichmann: Tutorial 3 FoF

3. Binomial Trees: Valuing European Options

Assume that each period, the non-dividend paying stock of “HoF-AG” can either
increase or fall by 30% in value, that is, 𝑑 = 0,70 , 𝑢 = 1,30. The initial price
of the stock is 50€ per share and the risk-free rate is 6% per period. Compute
the value of a European Put Option with a strike price of 47,50€ and maturity in
2 periods, using risk-neutral valuation.

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 Timo Reichmann: Tutorial 3 FoF

4. Binomial Trees: Valuing American Options

Assume the same setup as in exercise 3. Now calculate the value of an

American Put Option, using risk neutral valuation.

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 Timo Reichmann: Tutorial 3 FoF

5. Black-Scholes Formula

The current stock price is 𝑆 = 50€. Its volatility (=annualized standard

deviation) is 𝛿 = 20% 𝑝. 𝑎. and the interest rate on risk-free investments is
𝑖 = 5% 𝑝. 𝑎. (continuously compounded). What is the price of a call with strike
price of 55 Euros and maturity in 9 months from now?

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 Timo Reichmann: Tutorial 3 FoF

6. Option Strategies

We will evaluate and draw different option strategies together. More information
will be given in the tutorial.
6.1 Bull-Call Spread (see lecture slides 31 – 32)
Suppose your option portfolio consists of a long call with strike price 𝐾1 = €45
(price is €7,538) and a short call with strike 𝐾2 = €55 (Price is €2,2016). Both
options have the same maturity. Draw the payoff-profile and the P&L of this
strategy! What is the idea behind the strategy? Furthermore, make some
statements about the performance of the strategy (minimum loss, Break-Even,
etc.).

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 Timo Reichmann: Tutorial 3 FoF

6.2 Long Straddle

Suppose your option portfolio consists of a long put with strike price 𝐾1 = €50
(price is 𝑃 = €2,55) and a long call with strike 𝐾2 = €50 (Price is 𝐶 =
€4,39). Both options have the same maturity. Draw the payoff-profile and the
P&L of this strategy! What is the idea behind the strategy? Furthermore, make
some statements about the performance of the strategy (minimum loss, Break-
Even, etc.).

H i e r w i r d W i s s e n W i r k l i c h k e i t