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Homework Assignment 5 (4 points) Let the value A(n) of a secure asset at time n be given by A(n) = (1 + r)A(0). Fur-

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Homework Assignment 5 (4 points) Let the value A(n) of a secure asset at time n be given by A(n) = (1 + r)"A(0). Fur- thermore assume that S(n) is the price of a stock at time n such that the Fundamental Theorem of Asset Pricing applies to this Discrete Market Model (a) Draw pay-off diagrams to show the equation C(N) - P(N) = F(N). Here C(N) and P(N) are the pay-off of a call option and a put option with strike price X at the exercise time N, respectively. Moreover F(N) denotes the pay-off of a forward contract with forward price X and delivery time N. (b) Use the Fundamental Theorem of Asset Pricing to derive from (*) the equation C(0) - P(0) = S(0) - (1 + r)-NX. Homework Assignment 5 (4 points) Let the value A(n) of a secure asset at time n be given by A(n) = (1 + r)"A(0). Fur- thermore assume that S(n) is the price of a stock at time n such that the Fundamental Theorem of Asset Pricing applies to this Discrete Market Model (a) Draw pay-off diagrams to show the equation C(N) - P(N) = F(N). Here C(N) and P(N) are the pay-off of a call option and a put option with strike price X at the exercise time N, respectively. Moreover F(N) denotes the pay-off of a forward contract with forward price X and delivery time N. (b) Use the Fundamental Theorem of Asset Pricing to derive from (*) the equation C(0) - P(0) = S(0) - (1 + r)-NX

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