Financial options

Financial options

1. 1. A call option's payoff at expiration is:

   max(S_T - K, 0)max(K - S_T, 0)S_T - K (always positive)K (the strike)
2. 2. Given: S_0 = $100, K = $100, T = 1 year, r_f = 5%, Call price C = $8. Using put-call parity, what should the put price P be? Answer in dollars to two decimals.

   Answer for question 2$
3. 3. Which of the following are true of an option's TIME VALUE (price minus intrinsic value)?

   Always non-negativeLargest when the option is at-the-moneyShrinks as expiration approaches (time decay)Negative for in-the-money options
4. 4. Binomial: S_0=$50, u=1.2, d=0.9, K=$50, r_f=4%. Compute the replicating-portfolio delta Δ = (C_u - C_d)/(S_u - S_d).

   Answer for question 4