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Old 11-02-2017, 12:10 AM
Peter T.W. Chen Peter T.W. Chen is offline
CAS SOA Non-Actuary
 
Join Date: Oct 2017
Posts: 15
Post Comparing Options Time to Expiry question

I have a question on ASM 10th edition Chapter 7 P.93 Example 7C.

For a nondivedend paying stock with price 21:
(i) The continuously compounded risk-free raye is 4%.
(ii) A European 3-month put option on the stock with strike price 20 costs 1.00.
(iii) A European 6-month put option on the stock with strike price 20.30 costs 0.90.
You take advantage of arbitrage. Assume that you sell one 3-month put option and follow the optimal strategy, and that the stock price is 19 after 3 months and 21 after 6 months.
Determine your net profit after 6 months.

I cannot understand the answer on the manual, can anyone help?
Let's fight for 2018 Mar MFE exam!! Gook Luck All!

Last edited by Peter T.W. Chen; 11-02-2017 at 02:35 AM..
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