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Section A.

1 Problems
1. Determine the price of a put option on a stock with strike $85 expiring in 12 months given the following information: the current stock price is $70, the stock is going to pay a dividend of $5 in 6 months, the risk-free rate of interest is 3%, and a call option on the stock with strike $85 expiring in 12 months costs $7.49. 2. A call and a put both with the same strike expiring in 15 months cost $20.00 and $1.65, respectively. If the risk-free rate is 7%, the stock’s current price is $55, and it pays no dividends, what is the strike? 3. A call and put both with strike 25 and time to expiration 36 months cost $7.83 and $10.00, respectively. If the stock pays no dividends and is currently priced at $20, what is the risk-free rate? 4. Describe what portfolio is needed to synthetically create a put option with strike $40 expiring in 6 months given that the current risk-free rate is 5.50% and the stock pays no dividends. 5. Describe what portfolio is needed to synthetically create a zero-coupon bond maturing with face value of $1000 in 9 months, given that the only options available expiring in 9 months have strike $50 and the stock pays no dividends. 6. Describe the security synthetically created with the following portfolio: A put option expiring in 18 months, a share of stock which pays fixed dividends at 6 and 12 months, and a short call option. The dividends each have a value of $20 and the strike is equal to $1020. 7. Determine the price of a put option on a stock with strike $60 expiring in 6 months given the following information: the current stock price is $40, the stock pays no dividends, the risk-free is 7%, and a call option on the stock with strike $60 expiring in 6 months costs $2.75. 8. Determine the price of a put option on a stock with strike $20 expiring in 36 months given the following information: the current stock price is $10, the stock pays no dividends, the risk-free is 6%, and a call option on the stock with strike $20 expiring in 36 months costs $7.70.

© 2009 The Infinite Actuary, LLC

1

Joint Exam 3F/MFE (A.1 Problems)

respectively. 17. the call is worth $8 less than the corresponding put option. however. A call option expiring in 12 months. a short share of stock which pays a fixed dividend in 6 months. and a put option on the stock with strike $55 expiring in 18 months costs $1. For problems 12-14. Determine the price of a call option on a stock with strike $55 expiring in 18 months given the following information: the current stock price is $90. the risk-free rate is 8%. 10. 14. and the stock pays no dividends. 16. The stock pays a single dividend in 6 months of $1. A put option with strike $60 expiring in 9 months. and a short put option expiring in 12 months. A call option and a short put option (with the same strike and maturity) and some cash invested at the risk-free rate. A call and a put expiring at the same time with strike $40 on a non-dividend-paying stock differ in price. A 1-year bond maturing with a face value of $1000 that pays semi-annual coupons at an annual rate of 8%. the call option being worth $4 more than the put option. the current risk-free rate is 4%. describe the portfolio required to synthetically create the security given: 12. describe the security which has been synthetically created with the given portfolio: 15. For problems 15-17. What other piece of information can we derive? © 2009 The Infinite Actuary. If the time to expiration remains the same but the option strikes change to $60. what is the value of the dividend if the risk-free rate is 6%? 11. 20 put options (costing $7. and the stock pays no dividends.02 apiece) with strike 50 expiring in 1 year. If the stock’s current price is $35 and it pays a dividend in 6 months. Determine the initial stock price. A call option with strike $125 expiring in 18 months. the stock is going to pay a dividend of $10 in 12 months. 20 shares of a stock which pays no dividends (and costs $55 per share) and short 20 call options (costing $15.13. A call and put both with strike $45 and time to expiration 18 months cost $3.46.1 Problems) . the current risk-free rate is 8%. LLC 2 Joint Exam 3F/MFE (A. 13.45 and $13.9.40 apiece) with strike 50 expiring in 1 year.