Courtney Gilliam

3.29.2017
FIN 433
CRN: 27706
UIN: 00981224

FIN 433 Homework (12.12 & 12.14)

12.12 A stock price is currently $50. Over each of the next two three-month
periods it is expected to go up by 6% or down by 5%. The risk-free interest rate is
5% per annum with continuous compounding. What is the value of a six-month
European call option with a strike price of $51?
E0.05*0.25-.95/(1.06-0.95) = 0.5689
56.18-51= 5.18
5.18* .56892* E-.05*.5= 1.635

12.14 A stock price is currently $25. It is known that at the end of two months it will
be either $23 or $27. The risk-free interest rate is 10% per annum with continuous
compounding. Suppose ST is the stock price at the end of two months. What is the
value of a derivation that pays off S2/T at this time?
(50*25-f)e0.10*0.1666= 621
F= 639.3