MATH 534 Final: MATH 537 UMass Amherst finalF13soln
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Instructions: show all your work for full credit, and box your answers when appropriate. Unless otherwise noted, the risk free rate is per annum with continuous compounding and there are no arbitrage opportunities: the risk-free rate is 3%. Today the spot price of aapl is . The asset will pay no dividends during the next year. A one-year european put on aapl with strike. Construct an arbitrage opportunity involving one of these puts, and compute the pro t from this strategy in today"s dollars. Solution: which is less than p + s0 = p + s0 = 70 + 600 = 670. So long the put and the asset at t = 0, and in 1 year, sell the asset for at least (either at market price, or at put strike, whichever is greater). You are guaranteed a pro t in today"s dollars worth at least 679. 31 670 = 9. 31: rank the prices of the various positions.
