10.1

Let _S = $100, _K = $105, _r = 8%, _T = 0_.5, and = 0 (i.e. no dividends). Let _u = 1_.3 and _d = 0_.8, and _n = 1.

• What are the premium, , and _B for a European call?
• What are the premium, , and _B for a European put?

10.2

Let _S = $100, _K = $95, _r = 8%, _T = 0_.5, and = 0 (i.e. no dividends). Let _u = 1_.3, _d = 0_.8, and _n = 1.

• Verify that the price of a European call is $16_.196.
• Suppose you observe a call price of $17. What is the arbitrage?
• Suppose you observe a call price of $15_.50. What is the arbitrage?

10.3

Let _S = $100, _K = $95, _r = 8%, _T = 0_.5, and = 0 (i.e. no dividends). Let _u = 1_.3, _d = 0_.8, and _n = 1.

• Verify that the price of a European put is $7_.471.
• Suppose you observe a put price of $8. What is the arbitrage?
• Suppose you observe a put price of $6. What is the aribtrage?