Finance (Derivative Securities) Version 2 Dr. Kurt Smith Page 1 ASSIGNMENT 2 [15 marks] Instructions This assignment must be your own work. Answer all questions. This assignment is worth a total of fifteen [15] marks. The deadline for submission is Friday, 25th October 2013, at 12:00. Submit your assignment in accordance with the submission details on Blackboard. Questions 1-3 inclusive have the following common conditions (unless stated otherwise): • the riskless interest rate 0r>; • the underlier is trading at a spot price S; and • all options are European vanillas on the same underlier and have the same maturity date 0T=. Question 1 [4 marks] What are the no-arbitrage boundary conditions for the value of a European vanilla Call option with strike price 1K? Question 2 [5 marks] Another European vanilla Call option with strike price 21KK> is trading in the market. What are the new no-arbitrage boundary conditions for the value of the European vanilla Call option with strike price 1K? Question 3 [6 marks] Another European vanilla Call option with strike price 3K is trading in the market. At the expiry of the three options (i.e. at 0T=), what are the new no-arbitrage boundary conditions for the value of the European vanilla Call option with strike price 1K, if 312KKK