JKUAT Business & Financial Derivatives 2 Problems

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Business Finance

Jomo Kenyatta University of Agriculture and Technology

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Assignment 1: 2. Suppose you own a share that has a current price of Ksh. 150. Its price at the end of one year has two possibilities: either Ksh 100 or Ksh. 300. Assume that you sell a call option on the share with an exercise price of Ksh. 200. a) Can you create a portfolio of certain number of shares (let us call it delta, ∆) and one call option in such a way that there is no uncertainty of value of portfolio at the end of one year? (Yes/ No) Explain b) Let us assume that you create a portfolio of shares and an option by buying ∆ (delta) shares and selling a call option. What is the value of your portfolio if the prices at expiration increases to Ksh. 300 or decreases to Ksh. 100 from its present level of Ksh. 150? Explain and illustrate the binomial-tree for option valuation.
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Assignment 1:
2. Suppose you own a share that has a current price of Ksh. 150. Its price at the end of one year
has two possibilities: either Ksh 100 or Ksh. 300. Assume that you sell a call option on the share
with an exercise price of Ksh. 200.
a. Can you create a portfolio of certain number of shares (let us...

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