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The price of a European put that expires in six months and has a strike price of $100 is $3.59. The underlying stock price is $102, and a dividend of $1.50 is expected in four months. The term structure is flat, with all risk-free interest rates being 8% (cont. comp.).
What is the price of a European call option on the same stock that expires in six months and has a strike price of $100?
[1 marks]
Explain in detail the arbitrage opportunities if the European call price is $6.1. How much will be the arbitrage profit?
[3.5 marks]
Explain in detail the arbitrage opportunities if the European call price is $8.8. How much will be the arbitrage profit?
[3.5 marks]
Problem 2: Option Valuation (18 marks)
In this question, you need to price options with various approaches. You will consider puts and calls on a share. Please read following instructions carefully:
The spot price of this share will be determined by your student number. You need to use the last digit of your student number. The spot price of the share will be (last digit of your student number*10+6). For example, if the last digit of your student number is 5, the spot share price will be 5*10+6=56. If the last digit of your student number is 0, please replace it with 4, i.e. the spot price will be 4*10+6=46.
The strike price of the options will be the share price you just calculated +2. For example, if the share price you calculated based on your student number is 56, the strike price of the options will be (56+2)=58.
Based on this spot price and this strike price as well as the fact that the risk-free interest rate is 6% per annum with continuous compounding, please undertake option valuations and answer related questions according to following instructions:
Binomial trees:
Additionally, assume that over each of the next two four-month periods, the share price is expected to go up by 11% or down by 10%.
Use a two-step binomial tree to calculate the value of an eight-month European call option using the no-arbitrage approach.
[2.5 marks]
Use a two-step binomial tree to calculate the value of an eight-month European put option using the no-arbitrage approach.
[2.5 marks]
Show whether the put-call-parity holds for the European call and the European put prices you calculated in a. and b.
[1 mark]
Use a two-step binomial tree to calculate the value of an eight-month European call option using risk-neutral valuation.
[1 mark]
Use a two-step binomial tree to calculate the value of an eight-month European put option using risk-neutral valuation.
[1 mark]
Attachments:
5537762_1_main-case-study-assignment-2214afe-final-1-.docx

Prepare questions foryour group based around a “big idea” and avoid focusing on the details. Look for themes or one idea that weaves throughout the selection.
Good discussion questions will not have a clear right or wrong answer. They can be answered (i) and supported in multiple ways (multiple perspectives). What questions can you think of? WLEI
0
Look for any ethical issues in the selection when creating discussion questions. Topics coil include, conflict, stereotypes, prejudices, biases, and social expectations.
Base your questions on any ambiguous (unclear) information from the selection. Does a character act unexpectedly? Are there any unanswered questions about the plot or conflict? Lil (i) Z
@ M. Tallman 205 • www.GotToTtach.com
Attachments:
5537793_1_616656F7-1EB5-43E4-9DE2-8CD786FE9D5A.jpeg

Accrual accounting recognises transactions and events when revenues are earned and expenses are incurred. For example interest earned at the end of an accounting period will be recorded even if the amount has not been received. That is, application of the matching principle. Although cash may not have been received, business records need to recognise that the revenue has been earned. If goods are sold on credit on 25 June 2018 but the account Is not paid until 10 July 2018 the sale is still recognised on 25 June 2008. This means it is Included as income for the period ended 30 June 2018 and not when the money is received. Balance day adjustments allows matching principle to be carried out. Adjustment entries facilitate a better matching of revenues and expenses. Ensures a more accurate profit figure for the period. Adjustments are carried out at balance day before revenues and expenses are closed to P& L account. Balance day adjustments are general journal entries made as at balance day in order to compare (match) the revenues and expenses accurately so that the profit (loss) can be determined.
BAD DEBTS
If a business allows sales on credit, it Is normal to expect that some of these will not be paid. Bad debts are recognised as soon as they occur.
Bad debts are an expense to the business.
Eg. A firm is owed $990 by B. Payless and his solicitor has advised that he Is bankrupt and will be unable to repay the debt.
General Journal
2016 Ledger Accounts Debit S Credit $ 30/6 Bad debt GST Collected Debtors control account (B Payless) Being debt owing by B Payless written off due to bankruptcy
If the bad debt relates to a previous accounting period then the Bad debt account should be closed to the Allowance for doubtful debts if the business has made such an allowance.
Attachments:
5538010_1_page-186-notes.pdf