MATH 534 Midterm: MATH 537 UMass Amherst midtermF17soln
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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 stocks do not pay dividends: you own a bond which will pay in 9 months and in 15 months. The risk-free rate is 4% per annum with quarterly compounding. 4 )4(15/12 3/12) = 1000(1. 01)2+2000(1. 01)4 : the spot price of amazon. com (amzn) is . Over the next year, the only dividend amzn will pay is in 6 months. 1-year at-the-money european call on amzn is . (a) what, if anything, can you say about the price of a 1-year at-the-money amzn. Solution: put-call parity implies p320 30e0. 03 p320 = 60. 10. No arbitrage implies p320 p300 max{300e 0. 03 300, 0}. Find the range of x that will make the knock-out have a positive expected pay-o .
