Carnegie Mellon

21-370 Discrete-Time Finance
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Assignments: Week #2

Reading:
  • Monday: Labor Day. No class.
  • Wednesday: Section 1.2.
  • Friday: Section 1.2.

Exercises:
  • Wednesday:
    1. Problem 1.2
    2. Problem 1.3
    3. Problem 1.6
    4. Consider the one-period 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 {V1(H), V1(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 {V1(H), V1(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:

  1. Your name (on every page if you ignore #4.),
  2. Your class section,
  3. The names of those students with whom you have collaborated,
  4. a staple.