CORPORATE FINANCE AND INVESTMENTS Option pricing exercises Please use MS Excel to solve these exercises. Exercise 1. Let us have an underlying asset with a current market price of EUR 65. The price of...

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CORPORATE FINANCE AND INVESTMENTS Option pricing exercises Please use MS Excel to solve these exercises. Exercise 1. Let us have an underlying asset with a current market price of EUR 65. The price of the underlying asset may increase by 30% or decrease by 22% in one year (the annual risk-free rate of return is 8%). There is a put option on this underlying asset with a strike price of 70 euros, which expires after one year. The put option is traded today at the level of 8.80 euros. · Is there a possibility to earn arbitrage income in this situation? If yes, explain the mechanism for generating arbitrage proceeds. Exercise 2. You write one call option with an exercise price of 80 euros at a price of 9.5 euros and you take a long position in two call options with an exercise price of 90 euros at a price of 3.5 (for one option). Sketch the payout profile in the figure (also indicating the payout profiles of the underlying options and do not forget the numerical values). What is such a strategy called and what is the logic of using such a strategy? · In this case, what are the maximum loss (es) and profit (s) (please also consider those cases where ST = 0 and ST → ∞)? Also indicate the corresponding price levels. Also provide the derivations of the maximum / minimum profit (s) / loss (s) and the corresponding price levels! · What are the profit threshold (s) for this strategy? Also indicate the corresponding price level (s). Also provide the derivation of the price level (s) of the break-even point (s)! Exercise 3. The current market price of the underlying asset is 75 euros. The price of a one-period call option is 12,402 euros and the price of a put option is 3,088 euros, with the exercise price of both options being 67 euros.  What is the expected volatility (in%) of the price of the underlying asset, assuming that the underlying asset may increase or decrease by the same amount over a period of time? The risk-free rate of return is 2%. (The binomial model of option valuation should be used to solve the problem, not the Black-Scholes formula! To calculate the factors u and d, simply assume that s + = 1 u and s - = 1 d ). _1444415407.unknown _1444415406.unknown