Scribd Logo
Upload

Welcome to Scribd!

  • 69 views

    Assignment 1

    Uploaded by

    Uroona Malik
    The document provides solutions to several options pricing problems. It uses put-call parity and other options pricing formulas to back out unknown variables like the strike price or number of shares to purchase in order to synthetically create Treasury bills or other securities with a given maturity value. The examples calculate values needed like the strike price or number of shares based on given stock prices, option prices, interest rates, dividends, and target maturity values.

    Copyright:

    © All Rights Reserved
    Download as DOCX, PDF, TXT or read online from Scribd

    Assignment 1

    Uploaded by

    Uroona Malik
    69 views6 pages
    The document provides solutions to several options pricing problems. It uses put-call parity and other options pricing formulas to back out unknown variables like the strike price or number of shares to purchase in order to synthetically create Treasury bills or other securities with a given maturity value. The examples calculate values needed like the strike price or number of shares based on given stock prices, option prices, interest rates, dividends, and target maturity values.

    Original Description:

    Original Title

    Assignment 1 (1).docx

    Copyright

    © © All Rights Reserved

    Available Formats

    DOCX, PDF, TXT or read online from Scribd

    Did you find this document useful?

    Is this content inappropriate?

    The document provides solutions to several options pricing problems. It uses put-call parity and other options pricing formulas to back out unknown variables like the strike price or number of shares to purchase in order to synthetically create Treasury bills or other securities with a given maturity value. The examples calculate values needed like the strike price or number of shares based on given stock prices, option prices, interest rates, dividends, and target maturity values.

    Copyright:

    © All Rights Reserved
    Download as DOCX, PDF, TXT or read online from Scribd
    Download as docx, pdf, or txt
    69 views6 pages

    Assignment 1

    Uploaded by

    Uroona Malik
    The document provides solutions to several options pricing problems. It uses put-call parity and other options pricing formulas to back out unknown variables like the strike price or number of shares to purchase in order to synthetically create Treasury bills or other securities with a given maturity value. The examples calculate values needed like the strike price or number of shares based on given stock prices, option prices, interest rates, dividends, and target maturity values.

    Copyright:

    © All Rights Reserved
    Download as DOCX, PDF, TXT or read online from Scribd
    Download as docx, pdf, or txt
    of 6

    Assignment 1

    Data :-

    Stock Price = S0 = 95

    Risk Free Interest Rate = 6%

    Strike Price = K = ?

    Time = 3 month = 3/12 = 0.25 years Time Diagram

    Amount to lend = 96.35

    Month
    (1) (4) (7) (10)

    Div 0.8 0.8 0.8 0.8

    Solution :-
    C(S,K ,T ) - P(S,K ,T ) =S0 - PV(dividends) - K e -r T

    S0 = C(S,K ,T ) - P(S,K ,T ) + PV(dividends) + K e -r T

    Amount to lend = PV(dividends) + K e -r T


    PV(dividends) = 0.8(e 0.083 * 0.06 + e 0.33 * 0.06 + e 0.58 * 0.06 + e 0.83 * 0.06)

    PV(dividends) = 0.8 ( e - 0.005 + e -0.02 + e - 0.035 + e - 0.05 )

    PV(dividends) = 3.1136

    Amount to lend = PV(dividends) + K e -r T

    96.35 = 3.1136 + K e - 0.06 * 1


    K = ( 96.35 - 3.1136 ) e 0.06
    K = 99 Ans

    ( 1.11 ) You are given:

    (i) The price of a stock is 43.00.

    (ii) The continuously compounded risk-free interest rate is 5%.

    (iii) The stock pays a dividend of 1.00 three months from now.

    (iv) A 3-month European call option on the stock with strike 44.00 costs 1.90.

    You wish to create this stock synthetically, using a combination of 44-strike options expiring in 3 months
    and lending.

    Determine the amount of money you should lend.

    Data
    Stock Price = S = 43 Time Diagram
    Risk Free Interest Rate = 5%
    Strike Price = K = 44
    Time = 3 month = 3/12 = 0.25 years 0
    1 2 3
    C(K, T) = 1.90 Div (1) (1)
    Amount to lend = ?

    Solution :-
    -r T
    C(S,K ,T ) - P(S,K ,T ) =S - PV(dividends) - K e

    C ( S, 44, 0.25 ) - P ( 44, 0.25 ) = S - PV(dividends) - 44 e -0.05*0.25


    S = C ( 44, 0.25 ) - P ( 44, 0.25 ) + PV(dividends) + 44 e -0.0125

    PV (div) = 1(1+5%)-0.25 = 0.9878


    OR
    PV (div) = e -0.05 * 0.25 = 0.9878
    Amount to lend = PV(dividends) + 44 e -0.0125 = e -0.05 * 0.25 + 44 e -0.0125
    Amount to lend = 45 e -0.0125 = 44.4410 Ans

    Data
    Stock Index = 22

    Risk Free Interest Rate = 5%

    Strike Price = K = 21

    Time = 90 days = 3 month = 3/12 = 0.25 years

    C(S,K, T) = 1.90

    P(S,K, T) = 0.75

    Amount to Lend = ?

    Solution :- By using Continuous Dividend formula :-

    -r T
    C(S, K ,T ) - P(S, K ,T ) =S0 e- δT - K e

    C ( S, 21, 0.25 ) - P (S, 21, 0.25 ) = S0 e - 0.02 * 0.25 - 21 e - 0.05 * 0.25

    S0 = C ( S, 21, 0.25 ) - P (S, 21, 0.25 ) + 21 e - 0.0125 / e - 0.005

    S0 = C ( S, 21, 0.25 ) - P (S, 21, 0.25 ) e 0.005 + 21 e - 0.0075

    Thus we need amount to lend 21e 0.0075 = 20.84 ANS


    Data
    Stock Price = S = 40
    Risk
    Free
    Interest
    Rate = r
    = 4%
    Time = 182/365 =
    0.5 years
    K = 50
    P(S,K,T) = 11.00
    Maturity value = 10,000

    Solution:-
    We will back out the strike price K using put-call parity.
    -r T
    C(S, K ,T ) - P(S, K ,T ) =S e-δT - K e

    C(S,50, 0.5) - P(S, 50 , 0.5) = S e -0.01 * 0.5 - K e -0.04 * 0.5


    K e -0.04 * 0.5 = P(40,K, 0.5) - C(40,K, 0.5) - 40 e -0.01 * 0.5
    Since we want a maturity value of 10,000 we need the left hand side to be 10,000 e -0.02 so we
    multiply the equation by 10,000 / k = 200 thus we need to buy 200 e -0.005 = 199 .0025 shares of
    stock ANS

    1.15.
    You wish to create a synthetic 182-day Treasury bill with maturity value 10,000. You are given:
    (i) The stock price is 40.
    (ii) The stock pays continuous dividends proportional to its price at a rate of 2%.
    (iii) A 182-day European put option on the stock with strike price K costs 0.80.
    (iv) A 182-day European call option on the stock with strike price K costs 5.20.
    (v) The continuously compounded risk-free interest rate is 5%.
    Determine the number of shares of the stock you should purchase.

    Data
    Stock Price = S = 40
    Risk Free Interest Rate = r = 5%
    Time = 182/365 = 0.5 years
    C(S,K,T) = 5.20
    P(S,K,T) = 0.80

    Solution:-
    We will back out the strike price K using put-call parity.
    -r T
    C(S, K ,T ) - P(S, K ,T ) =S e-δT - K e

    C(40,K, 0.5) - P(40,K, 0.5) = 40 e -0.02 * 0.5 - K e -0.05 * 0.5


    5.20 - 0.8 = 39.602 - K (0.9753)
    4.4 + K (0.9753) = 39.602
    K = (39.602 - 4.4) / 0.9753 = 36.0935

    We multiply by 10,000/K to get a maturity value of 10,000. The number of shares of stock
    needed is

    (10,000/K) * e - δT = (10,000/36.0935) * e - 0.02 * 0.5 = 274.30

    The number of shares of stock needed is = 274.30 Ans

    1.16. You are given:

    (i) The price of a stock is 100.


    (ii) The stock pays discrete dividends of 2 per quarter, with the first dividend 3 months from
    now.

    (iii) The continuously compounded risk-free interest rate is 4%.

    You wish to create a synthetic 182-day Treasury bill with maturity value 10,000 using a
    combination of the

    stock and 6-month European put and call options on the stock with strike price 95.

    Determine the number of shares of the stock you should purchase.

    Data

    Stock Price = S = 100


    Risk Free Interest Rate = r = 4%
    Time = 182/365 = 0.5 years
    Strike Price = K = 95
    No: of shares = ?

    Solution

    By using Discrete Formula

    K + CumValue(dividends) = 95 + 2 e 0.04 (0.25) + 2 = 99.0201

    Therefore, the number of shares of stock is 10,000/99.0201 = 100.99 Ans

    You might also like