MATH 534 Midterm: MATH 537 UMass Amherst midtermsolnF05
Document Summary
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: the current price of microsoft (msft) is . In the next year, it has a 50% chance of going up by 15% and a 50% chance of going down by 10%. Let x denote the payo of a one-year european put on msft with strike . Compute the variance of the payo , v (x). Solution: x has a 50% chance of equalling max(0, 31 33) = 0 and a 50% chance of equalling max(0, 31 27) = 4. E[x] = 0. 5 0 + 0. 5 4 = 2. V (x) = 0. 5 02 + 0. 5 42 22 = 4: the current price of ibm (ibm) is . A 3- month european call with strike 210 trades for .
