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FIN416 Exam-2
Due by 9:30 a.m., April 1, 2012

Read the following paragraph before proceeding
Late Submissions Carry No Credit

It is required that you submit in plain text, within the body of the email sent to
sacharya@uic.edu, your UIN and then only two columns of numbers: (a) question
serial number and (b) the corresponding numerical answer. Write 999999 for all
blank answers. You are also required to attach to the email detailed works (scanned,
pdf or doc files) to your email; do not attach the answers which must be in plain text
within the email itself.

Non-numerical characters or explanations for answers within the body of the email
will not be accepted. Each question carries equal weight.

If you believe that more data are necessary to solve, assume whatever you think is
necessary to answer the questions. All questions are required to be answered
independently without any consultation with other students or professors.

Email submissions with works attached are due by the deadline. Answers submitted by
any other means, after the deadline or without matching work will be treated as
missing with zero credit.

Take the data from the attached page corresponding to your UIN.

Interest rates are expressed as annualized rates for the term specified. Report your
interest rate answers as fractional numbers like 0.11 for 11% per year.

You should report any confusion (except how to solve the problems) by email right away to
get the clarification before completing the test.


Problem A: A A1-month American call option on a stock has a strike price
of A2 dollars. The current stock price is A3 dollars, the risk-free rate of
interest is 7 percent per annum, continuously compounded, and the stocks
volatility is A4 per annum. A dividend of $3 is expected at 4.5 months (the
ex-dividend date) from now. Use a five-step binomial model to calculate
the current fair call option price. Write your answers for the following:

1. Upward move of stock price, u.
2. Downward move of stock price, d.
3. Risk-neutral probability weight, p.
4. Stock price at node (00) after dividends are adjusted, reattached.
5. Stock price at node (10) after dividends are adjusted, reattached.
6. Stock price at node (11) after dividends are adjusted, reattached.
7. Stock price at node (20) after dividends are adjusted, reattached.
8. Stock price at node (21) after dividends are adjusted, reattached.
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9. Stock price at node (22) after dividends are adjusted, reattached.
10. Stock price at node (30) after dividends are adjusted, reattached.
11. Stock price at node (31) after dividends are adjusted, reattached.
12. Stock price at node (32) after dividends are adjusted, reattached.
13. Stock price at node (33) after dividends are adjusted, reattached.
14. Stock price at node (40) after dividends are adjusted, reattached.
15. Stock price at node (41) after dividends are adjusted, reattached.
16. Stock price at node (42) after dividends are adjusted, reattached.
17. Stock price at node (43) after dividends are adjusted, reattached.
18. Stock price at node (44) after dividends are adjusted, reattached.
19. Stock price at node (50) after dividends are adjusted, reattached.
20. Stock price at node (51) after dividends are adjusted, reattached.
21. Stock price at node (52) after dividends are adjusted, reattached.
22. Stock price at node (53) after dividends are adjusted, reattached.
23. Stock price at node (54) after dividends are adjusted, reattached.
24. Stock price at node (55) after dividends are adjusted, reattached.
25. Call option price at node (00).
26. Call option price at node (10).
27. Call option price at node (11).
28. Call option price at node (20).
29. Call option price at node (21).
30. Call option price at node (22).
31. Call option price at node (30).
32. Call option price at node (31).
33. Call option price at node (32).
34. Call option price at node (33).
35. Call option price at node (40).
36. Call option price at node (41).
37. Call option price at node (42).
38. Call option price at node (43).
39. Call option price at node (44).
40. Call option price at node (50).
41. Call option price at node (51).
42. Call option price at node (52).
43. Call option price at node (53).
44. Call option price at node (54).
45. Call option price at node (55).






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Node numbering is as done in class:

55
44
33 54
22 43
11 32 53
00 21 42
10 31 52
20 41
30 51
40
50




Problem B: A B1-month American put option on a stock has a strike price
of B2 dollars. The current stock price is B3 dollars, the risk-free rate of
interest is 8 percent per annum, continuously compounded, and the stocks
volatility is B4 per annum. Use a five-step binomial model to calculate the
current fair put option price. Write your answers for the following (node
numbering is the same as in Problem A):

46. Upward move of stock price, u.
47. Downward move of stock price, d.
48. Risk-neutral probability weight, p.
49. Stock price at node (00).
50. Stock price at node (10).
51. Stock price at node (11).
52. Stock price at node (20).
53. Stock price at node (21).
54. Stock price at node (22).
55. Stock price at node (30).
56. Stock price at node (31).
57. Stock price at node (32).
58. Stock price at node (33).
59. Stock price at node (40).
60. Stock price at node (41).
61. Stock price at node (42).
62. Stock price at node (43).
63. Stock price at node (44).
64. Stock price at node (50).
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65. Stock price at node (51).
66. Stock price at node (52).
67. Stock price at node (53).
68. Stock price at node (54).
69. Stock price at node (55).
70. Put option price at node (00).
71. Put option price at node (10).
72. Put option price at node (11).
73. Put option price at node (20).
74. Put option price at node (21).
75. Put option price at node (22).
76. Put option price at node (30).
77. Put option price at node (31).
78. Put option price at node (32).
79. Put option price at node (33).
80. Put option price at node (40).
81. Put option price at node (41).
82. Put option price at node (42).
83. Put option price at node (43).
84. Put option price at node (44).
85. Put option price at node (50).
86. Put option price at node (51).
87. Put option price at node (52).
88. Put option price at node (53).
89. Put option price at node (54).
90. Put option price at node (55).

C. Use Blacks approximation to find the current fair values of a 13-month American call
option with a strike price of C1 on a dividend paying stock trading at a current market
price of C2, volatility of C3, interest rate of C4 percent per year, continuously,
compounded. The stock will go ex-dividend every 3 months starting from time zero and
the amount of each quarterly dividend is 4 percent of the current stock price. Obtain the
following fair values of options needed to find Blacks approximate American call value:

91. European call option with maturity at first ex-dividend date.
92. European call option with maturity at second ex-dividend date.
93. European call option with maturity at third ex-dividend date.
94. European call option with maturity at fourth ex-dividend date.
95. European call option with maturity 13 months.
96. Current fair value of American call using Blacks approximation