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HW5

The document outlines a financial scenario involving two primitive assets: a risk-less bond and a risky stock. It poses a problem to find the arbitrage-free price of a call option on the stock with a specific strike price and discusses a market mispricing of the call option. The document is part of a homework assignment dated October 15, 2024.

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5 views1 page

HW5

The document outlines a financial scenario involving two primitive assets: a risk-less bond and a risky stock. It poses a problem to find the arbitrage-free price of a call option on the stock with a specific strike price and discusses a market mispricing of the call option. The document is part of a homework assignment dated October 15, 2024.

Uploaded by

Sergio García
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PDF, TXT or read online on Scribd
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HW5

AMA

2024-10-15

Consider the following two primitive assets:


(i) Risk-less bond (or bank account), with price normalized to 1, pays a face value of Zt+1,f = 1.1 in
two states at t + 1.
(ii) Risky stock that is worth $100 at t and can either provide a payoff of $100 or $150 at t + 1.
′
Define the securities market as the pair ( Pt , Pt+1 ) with N = 2 = S and take the first security as the
N ×1 N ×S
risk-less security and the second one as the stock.
1. Find the AD price of a call on the stock with price Ct at t and strike K = $100 at t + 1.
2. Assume that the market miss-price the call as CtM = 9. Show that an A01 obtains.

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