Math 361 Spring ’22
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Department of Mathematics
Math 361 Spring ’22
1. Consider a one-period economy with the following information:
Compute
2. Assume a one period, trinomial state model for the evolution of a non- dividend paying stock. We know that the yearly rate for discounting is r = 0.25, today’s (time 0) stock value is S0, and that there there is a market for the following two financial derivatives VA and VB defined by the following payoff conditions at expiration time T = 1:
where K is a ”strike” chosen by the option purchaser. We will assume that a risk-neutral measure exists in this world. An analysis of past data shows that the market for financial derivatives A and B have their prices (for some α to be determined) as
where K is again left to the buyer to determine.
(a) Is there enough data here to find the price F of a Forward contract on a unit of stock S1 at time T = 1? If so, what is F in terms of
the initial stock price S0 at time 0? (40 pts.)
(b) Does α depend on K? (10 pts.)
2022-01-29