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 stocks 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

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

9. 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 stock is going to pay a dividend of $10 in 12 months, the risk-free rate is 8%, and a put option on the stock with strike $55 expiring in 18 months costs $1.13. 10. A call and put both with strike $45 and time to expiration 18 months cost $3.45 and $13.46, respectively. If the stocks current price is $35 and it pays a dividend in 6 months, what is the value of the dividend if the risk-free rate is 6%? 11. A call and a put expiring at the same time with strike $40 on a non-dividend-paying stock differ in price, the call option being worth $4 more than the put option. If the time to expiration remains the same but the option strikes change to $60, however, the call is worth $8 less than the corresponding put option. Determine the initial stock price. For problems 12-14, describe the portfolio required to synthetically create the security given: 12. A put option with strike $60 expiring in 9 months; the current risk-free rate is 4%, and the stock pays no dividends. 13. A call option with strike $125 expiring in 18 months; the current risk-free rate is 8%, and the stock pays no dividends. 14. A 1-year bond maturing with a face value of $1000 that pays semi-annual coupons at an annual rate of 8%. The stock pays a single dividend in 6 months of $1. For problems 15-17, describe the security which has been synthetically created with the given portfolio: 15. A call option and a short put option (with the same strike and maturity) and some cash invested at the risk-free rate. 16. A call option expiring in 12 months, a short share of stock which pays a fixed dividend in 6 months, and a short put option expiring in 12 months. 17. 20 put options (costing $7.02 apiece) with strike 50 expiring in 1 year, 20 shares of a stock which pays no dividends (and costs $55 per share) and short 20 call options (costing $15.40 apiece) with strike 50 expiring in 1 year. What other piece of information can we derive?

2009 The Infinite Actuary, LLC

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