21370 DiscreteTime Finance

Assignments: Week #2
Reading: 
 Monday: Labor Day. No class.

Wednesday: Section 1.2.

Friday: Section 1.2.

Exercises:


Wednesday:
 Problem 1.2
 Problem 1.3
 Problem 1.6
 Consider the oneperiod binomial model in Example 1.1.1.
(a) Use the risk neutral pricing formula to find the arbitrage free price of a call with strike price 7, and a put with strike price 3.
(b) Explain how any derivitive security making mayments {V_{1}(H), V_{1}(T)} at time 1 can be replicated using the call and put options from part (a)
(c) Find a very convenient formula for number of shares held in a replicating portfolio for the security making payments {V_{1}(H), V_{1}(T)} at time 1.

Homework assignments may be turned in before or after class on the due day, or
may
be placed in your TA's mailbox before 3:20pm on that day. The TA's
mailboxes are in the Math Department office, WEH 6113.
Please make sure your homework
includes the following:
 Your name (on every page if you ignore #4.),
 Your class section,
 The names of those students with whom you have collaborated,
 a staple.