Assosa University

College of Natural and computational Sciences Date 27/03/2016 E.C

Financial mathematics final Exam for 3rd year students. Time Allowed: 2:20 hrs

Max mark (40%) .

Name: _______________________ Id No: ________ section : _____
Part I Say True if statement is correct False if statement is incorrect (2 points Each)
_____1. An option is obligation to buy or sell underling asset.
_____2. A call option is a valuable if strike price is greater than stoke price.
_____3. An arbitrage is trading strategy resulting in portfolio with zero probability of loss.
_____4. The parties to buy the asset is assumed as long position
_____5. The future contract is bought or sold an asset on limited time of exchange.
Part II. Define the following terms (12 points Each)
5. (a) The law of one price
(b) Strong law of large number
(c) Derivative and it type with brief explanation
(d) Write difference between forward and future
(e) Options

Part III. (Work out ). Show all necessary steps clearly and briefly (18pts)
1. The time to failure in thousands of hours of an important pieces of electric equipment used in
a manufactured DVD players has the density function

{
−2 x
f ( x )= 2 e ,∧x> 0 ? (4pts )
0 ,∧otherwise
Find the expected life of this pieces of equipment
2. Let X is binomial distribution with X B(N , P) then show that
E ( X 2) =np (np+q) (5pts)
3. Consider a six month long forward contract of a non in come paying security having risk free
interest of 5% per annum. The stock price is 300birr and delivery price is 200. Find the value
of forward contract? (4pts)
4. Find moment generating function of standard normal distribution x N (0 ,1) mean that ( e λx ) .
(5pts)