Question
a)You wish to create a financial instrument that has a payoff in 6 months time equal to the maximum value of $2,000 and $2,000 +
a)You wish to create a financial instrument that has a payoff in 6 months time equal to the maximum value of $2,000 and $2,000 + $0.5*(S&P Index in 6months time 3,200). The 6-month call and put options with strike price3,200 is trading at 120 and 110, respectively. What is the cost of your instrument?
b) A stock has traded at an average price of $50 over the course of a trading day. The covariance of successive transaction price changes (trade-by-trade changes in price) is about -0.06. Using the Roll model, what is the estimate of the bid-ask spread of the stock (measured in percent of the average price of $50)?
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