Fin 441 Hw1
Fin 441Homework #1Days to expires = 72 daysBid discounts = 7.44Ask discounts = 7.20Average discount = (7.44+7.20)/2 = 7.3272 days $100 T-bill price = 100 – 7.32*(72/360) = 98.536T-bill annualized yield = (100/98.536)^(365/7) – 1 = 7.76%MonthStrikeMarket priceExercise priceIntrinsic ValueMarket priceTime ValueLower BoundJul160165.131605.136.000.875.44Aug170165.131700.003.203.200.00Oct155165.1315510.1314.003.8712.66Intrinsic Value = Max(0, Market price – Exercise price)
Jul: 165.13 – 160 = 5.13Aug: 165.13 – 170 = -4.87 => 0Oct: 165.13 – 155 = 10.13Time Value = Market price – Intrinsic ValueJul: 6.00 – 5.13 = 0.87Aug: 3.20 – 0 = 3.20Oct: 14.00-10.13 = 3.87T = Days to expire / 365TJul = 14/365 = 0.0384TAug = 49/365 = 0.1342TOct = 105/365 = 0.2877Lower Bound = Max(0, Market price – Exercise Price*(1+Risk free rate)^(-T)Jul: 165.13 – 160*(1+0.0516)^(-0.0384) = 5.44Aug: 165.13 – 170*(1+0.055)^(-0.1342) = -3.65 => 0Oct: 165.13 – 155*(1+0.0588)^(-0.2877) = 12.66MonthStrikeMarket priceExercise priceIntrinsic ValueMarket priceTime ValueLower BoundJul165165.131650.002.352.350.00Aug160165.131600.002.752.750.00Oct170165.131704.879.004.132.10Intrinsic Value = Max(0, Exercise price – Market price)Jul: 165 – 165.13 = -0.13 => 0Aug: 160 – 165.13 = -5.13 => 0Oct: 170 – 165.13 = 4.87Time Value = Market price – Intrinsic ValueJul: 2.35 – 0 = 2.35