MATH 534 Midterm: MATH 537 UMass Amherst midtermS06soln
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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. All prices should be to nearest cent: apple (aapl) spot price is . Let pk be the price today of a 1-year european put on aapl with strike k. the market prices are p140 = 5, p150 = 12, p160 = 22. Solution: from the butter y payo graph we see that the pay-o function has a max of 10 at s1 = 150. The risk-free rate is 5%. (a) compute the 9-month forward price of ibm. (b) there is a 70% chance the ibm price (in 9 months) will increase by , a. 10% chance the ibm price will not change, and a 20% chance the ibm price will decrease by .
