...Ch 9 Profit profile Pay off profile Definitions know concepts Margin question- how your margin account behaves given certain prices (options) Ch. 10 Variables of option pricing slide 3 –input paramaters affecting stokc options Boundary counditions (eg. Lower bound for European calls) Put call parity –replicate by moving everything else in the other side sell most expensive buy least expensive Slide 5 Bull spread/bear spread using calls and puts, e.g. max profit in bull/bear spread Box spread- payoff difference between strike prices = price today pv of difference of strike price Calendar spread(not specific question) Strip-strap whats strategy in place, profit expectation Ch. 12 Use contrstuct binomial trees Derivative with payoff = st2 – 750 <-pays this amount in maturity T=0.5 years Rf= 5% continuously compounded So=30 Volatility=20% delta(t)=.25 /36.64 30 -<33.16 27.15 \24.56 U=e^sigmasqrt(deltaT)=e.2sqrt(.25)=1.10517 d=e^-sigmasqrt(deltaT)=1/u=0.90484 Upper bound 30*1.10517=33.16 33.16*1.10517=36.64 Lower bound 30*.90484=27.15 27.15*.90484=24.56 p=(e^rdelta*t)-d/u-d=.5378 1-p=.4622 Payoff St^2-750= 36.64^2-750=592.5 30^2-750= 150 24.56^2-750=-146.81 Calculate value of derivative thru nodes B: ([.5378)(592.5)+.4622(150)) e^-.05(.25) C=.5378(150)+.4622(-146.81)e^-.05(.25) A=(.5378(B) + .4622(B) )e^-.05(.25) Payoff 33 = put 36.64 strike price payoff...
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