ALL 25 CHAPTERS COVERED
SOLUTIONS MANUAL
,1 Chapter 1: Financial Derivatives
Problem 1
(a) The following plots show the respective payoff diagrams at expiration:
Payoff of Short Stock and Written ATM Call
10
Short Stock
Write Call
Combined
5
0
Payoff
−5
−10
−15
−20
0 2 4 6 8 10 12 14 16 18 20
S
Payoff of Put and Call at K1 and K2
8
Put at K1
Call at K2
7
Combined
6
5
Payoff
4
3
2
1
0
0 2 4 6 8 10 12 14 16 18 20
S
1
, Payoff of Long Put, Short Call at K1, Long Call, Short Put at K2
8
Long Put, Short Call at K1
6 Long Call, Short Put at K2
Combined
4
2
0
Payoff
−2
−4
−6
−8
−10
−12
0 2 4 6 8 10 12 14 16 18 20
S
(b) The following plots show the respective payoff diagrams prior to expiration:
Pre−Expiry Payoff of Short Stock and Written ATM Call
10
Short Stock
Write Call
5 Combined
0
−5
Payoff
−10
−15
−20
−25
0 2 4 6 8 10 12 14 16 18 20
S
2
, Pre−Expiry Payoff of Put and Call at K1 and K2
14
Put at K1
Call at K2
12 Combined
10
8
Payoff
6
4
2
0
0 2 4 6 8 10 12 14 16 18 20
S
Pre−Expiry Payoff of Long Put, Short Call at K1, Long Call, Short Put at K2
8
6
4
2
0
Payoff
−2
−4
−6
−8
−10
−12
0 2 4 6 8 10 12 14 16 18 20
S
Problem 2
(a) Assuming a notional amount N. A cashflow takes place every 6 months, beginning in 12
months. The following table summarizes the cashflow:
3
SOLUTIONS MANUAL
,1 Chapter 1: Financial Derivatives
Problem 1
(a) The following plots show the respective payoff diagrams at expiration:
Payoff of Short Stock and Written ATM Call
10
Short Stock
Write Call
Combined
5
0
Payoff
−5
−10
−15
−20
0 2 4 6 8 10 12 14 16 18 20
S
Payoff of Put and Call at K1 and K2
8
Put at K1
Call at K2
7
Combined
6
5
Payoff
4
3
2
1
0
0 2 4 6 8 10 12 14 16 18 20
S
1
, Payoff of Long Put, Short Call at K1, Long Call, Short Put at K2
8
Long Put, Short Call at K1
6 Long Call, Short Put at K2
Combined
4
2
0
Payoff
−2
−4
−6
−8
−10
−12
0 2 4 6 8 10 12 14 16 18 20
S
(b) The following plots show the respective payoff diagrams prior to expiration:
Pre−Expiry Payoff of Short Stock and Written ATM Call
10
Short Stock
Write Call
5 Combined
0
−5
Payoff
−10
−15
−20
−25
0 2 4 6 8 10 12 14 16 18 20
S
2
, Pre−Expiry Payoff of Put and Call at K1 and K2
14
Put at K1
Call at K2
12 Combined
10
8
Payoff
6
4
2
0
0 2 4 6 8 10 12 14 16 18 20
S
Pre−Expiry Payoff of Long Put, Short Call at K1, Long Call, Short Put at K2
8
6
4
2
0
Payoff
−2
−4
−6
−8
−10
−12
0 2 4 6 8 10 12 14 16 18 20
S
Problem 2
(a) Assuming a notional amount N. A cashflow takes place every 6 months, beginning in 12
months. The following table summarizes the cashflow:
3
