Answers For 8

P = $3.21 ### Question 4 S = 51 PV(K) = 49 rf = .05${\sigma}=.2 T = .25 (3 months / 12 months) (1) \begin{align} d_1=\frac{ln(\frac{S}{PV(K)})}{\sigma\sqrt{T}}+\frac{\sigma\sqrt{T}}{2} \end{align} (2) \begin{align} d_1=\frac{ln\frac{51}{49}}{0.2\sqrt{0.25}}+\frac{0.2\sqrt{0.25}}{2} \end{align} (3) \begin{align} d_1=\frac{0.04}{0.1}+\frac{0.05}{2} \end{align}d_{1}$= .45 N($d_{1}$) = N(.45) = .6737 Shares ### Question 5 You can buy a call for$3 to protect yourself synthetically.
Sell the stock for $38 This generates a net of$38 - $3 =$35.
Invest the $35 at the risk free rate so it grows to$35 x (1+0.05) = $36.75 At maturity if the call is out of the money, buy the stock for under$35, deliver it against the short and keep your profits.
If the call is in-the-money, exercise the call, pay \$35 for the stock and deliver it against your short position. Keep your profits.

page revision: 4, last edited: 16 Feb 2009 03:38