﻿ 6.10 EXERCISES

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2.10 CHAPTER 2:  EXERCISES

1.  Using Option Tutor’s  Binomial Replication subject and the default parameters replicate

a)   1 Call option

b)   1 Put option

Record the stock and bond replicating portfolio for each case.

2. Using Option Tutor’s  Binomial Replication subject and the default parameters compute the risk neutral probabilities and explain why risk neutral valuation works in the binomial model.

3.  Define a hedge ratio.

4.  Define a riskless hedged portfolio.

5.  Using Option Tutor’s binomial delta hedging subject and the default parameters, construct a riskless hedged portfolio.  Record the stock and the option positions required to form this portfolio.

6. Suppose in a one-period binomial world that at each node the stock price can go up, down, or stay the same.

a)  Can you construct a synthetic call option?

b)  Explain the difference (if any) between your answer to a) and your answer to (5) above.

7. Suppose in a one-period binomial world that at each node the stock price can go up, down, or stay the same.   Using both the call option and put option, what arbitrage relationships must hold?