1) An American put option to sell a Swiss franc for USD has a strike price of 0.80 and a
time to maturity of 1 year. The volatility of the Swiss franc is 10%, the USD interest
rate is 6%, and the Swiss franc interest rate is 3% (both interest rates continuously
compounded). The current exchange rate is 0.81. Use a three time step tree to value the
option.
2) A futures price is currently 40 cents. It is expected to move up to 44 cents or down to
34 cents in the next six months. The risk-free interest rate is 6%.
i. What is the probability of an up movement in a risk-neutral world?
ii. What is the value of a six-month put option with a strike price of 37 cents? (Give two
decimal places)
iii. What is the value of a six-month call with a strike price of 33 cents? (Give two
decimal places)
3) A stock price is initially $30 and u in the Cox-Ross-Rubinstein tree is 1.1. What are
the stock prices at the end of two time steps
4) Fill in the blank: A CDO created from CDSs is known as a _ _ _ _ _ _ CDO
5) Consider a European put option on a index. The index level is 1,000, the strike price
is 1050, the time to maturity is six months, the risk-free rate is 4% per annum, and the
dividend yield on the index is 2% per annum. What is a lower bound to the option
price? (Give two decimal places.)
6) A stock price is initially $30 and a dividend of $2 is expected at the end of 1.5
months. The volatility is 30%. In a two step tree with each step equal to one month
what is the stock price on the middle node at the end of the tree? (Give two decimal
places)