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Problem 2. (a) What are the Time 0 prices for European Call and Put options on this asset if their exercise prices equal $10.50 and
Problem 2. (a) What are the Time 0 prices for European Call and Put options on this asset if their exercise prices equal $10.50 and they mature at Time 2? (b) What if they are American Call and Put options? (c) Demonstrate whether you can replicate a forward contract on the asset using European Call and Put options. If so, describe the call and put options in the replicating portfolio. (d) Using arbitrage arguments, derive an upper bound and a lower bound on the price of an European call option on the asset with an exercise price of $X (5,21). Problem 2. (a) What are the Time 0 prices for European Call and Put options on this asset if their exercise prices equal $10.50 and they mature at Time 2? (b) What if they are American Call and Put options? (c) Demonstrate whether you can replicate a forward contract on the asset using European Call and Put options. If so, describe the call and put options in the replicating portfolio. (d) Using arbitrage arguments, derive an upper bound and a lower bound on the price of an European call option on the asset with an exercise price of $X (5,21)
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