View Full Version : ASM Practice exam 4 - #5

mombasha

November 2nd 2007, 09:17 AM

Why can't I use the formulas for delta & B to solve this problem?

delta=.2625 = e^(-little delta*h) *(C(sub u) - C(sub d))/(S*(u-d)) which simplifies to

C(sub u)/(40*(u-d))

B = -8.715 = e^(-rh)*(u*C(sub d) - d*C(sub u))/(u-d), which simplifies to -d*C(sub u)/(u-d)

I isolate C(sub u)/(u-d) in each formula & set the other sides equal:

40*.2625 = 8.715/d

Then I get u=1.2048 instead of the correct answer u=1.23. What's going on?

econguy

November 2nd 2007, 12:51 PM

Why can't I use the formulas for delta & B to solve this problem?

delta=.2625 = e^(-little delta*h) *(C(sub u) - C(sub d))/(S*(u-d)) which simplifies to

C(sub u)/(40*(u-d))

B = -8.715 = e^(-rh)*(u*C(sub d) - d*C(sub u))/(u-d), which simplifies to -d*C(sub u)/(u-d)

I isolate C(sub u)/(u-d) in each formula & set the other sides equal:

40*.2625 = 8.715/d

Then I get u=1.2048 instead of the correct answer u=1.23. What's going on?

I guess, you are ignoring interest rate and dividend rate when you simplify

mombasha

November 5th 2007, 08:23 AM

I'm supposed to - both the interest & dividend rates are 0 in this problem.

yfeng

November 5th 2007, 02:52 PM

Here is where you got wrong.

If you do it carefully, 40*.2625 = (Cu-Cd)/(u-d), ok.

But 8.715 = (d*Cu-u*Cd)/(u-d), no way you can isolate Cu/(u-d) and make something like 8.715/d.

I isolate C(sub u)/(u-d) in each formula & set the other sides equal:

40*.2625 = 8.715/d

Abraham Weishaus

November 6th 2007, 07:24 AM

Your method works, but gets the same answer.

I solved your equations and got d=0.83. Then I plugged back in:

(40u-45)/(40u-40(0.83))=.2625

Solving for u, you get u=1.23.

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