《SOA exam-mfe-0507-sol》.pdfVIP

May 2007 Exam MFE Solutions 1. Answer = (B) Let D = the quarterly dividend. Using formula (9.2), put-call parity adjusted for deterministic dividends, we have 4.50 2.45 =+ ⎡52.00 − D ×e−0.01 − D ×e−0.025 ⎤ − ⎡50 ×e−0.03 ⎤ ⎣ ⎦ ⎣ ⎦ 54.45 =− D × 0.99005 + 0.97531 − 50× 0.970446 . ( ) Rearranging the equation yields D × 1.96356 54.45 =− 4.50 − 48.5223 1.4277 , or D 0.73 . 2. Answer = (A) Let p be the true probability of the stock going up. Thus, puS + (1 – p )dS = eαh S (which is equation (11.3) on p. 347), yielding αh e − d p . u − d Because α = 0.1, h 1, u 1.433, and d 0.756 , we have p = 0.52. 3. Answer = (C) Let P denote the price of the European put option. Then, P 98e−0.055×½ N (=−d2 ) −100e−0.01×½ N (−d1 ) by formula (12.3) with S = 100, K = 98, δ 1% , σ 50% , r = 5.5%, and T = ½. Here, d is calculated using formula (12.2a) and is equal to 0≈ 0.30; d is 1 2 from formula (12.2b) and is equal to −0.0559952 ≈−0.06. From the normal cdf table, N(0.06) = 0.5239 and N(−0.30) = 1 − 0.6179 = 0.3821. Thus, P ≈ 98e−0.055/ 2 × 0.5239 − 100e−0.01/ 2 × 0.3821 = 11.93 ≈ 11.90. 4. Answer = (E) For a special put option with strike price K, the payoff upon immediate exercise is K − 50. 1 This value should be compared with P, the price of the corresponding one-period European put option. The value of P can be determined using put-call parity: P Ke−r =− Se−δ + C . With S 5