Exam (elaborations) TEST BANK FOR An Introduction to the Mathematics of Financial Derivatives 2nd Edition By Salih N. Neftci

0 2 4 6 8 20 −20 −15 −10 −5 0 5 10 15 20 short stock short call combined position written call short stock short stock + short call FIGURE 0.1 Payo diagram for both a short sale of stock and an at-the-money call. i Payo diagram at expiration: 1 2 3 4 5 6 7 8 9 10 0 0.5 1 1.5 2 2.5 3 3.5 long put long call put + call FIGURE 0.2 Payo diagram for a long put with strike K1 and a long call with strike K2, K1 K2. Payo diagram at expiration: 0 2 4 6 8 10 12 −6 −4 −2 0 2 4 6 long put+short call short put + long call combined position K1 K2 FIGURE 0.3 Payo diagram for a (long put/short call) combination at K1 plus a (long call/short put) combination at K2 K1. ii (b) Payo diagram before expiration: 0 2 4 6 8 20 −25 −20 −15 −10 −5 0 5 10 short stock short call short stock combined position written call short stock + short call FIGURE 0.4 Pre-maturity payo diagram for both a short sale of stock and an at-the-money call. Payo diagram before expiration: 0 1 2 3 4 5 6 7 8 9 10 0 0.5 1 1.5 2 2.5 3 3.5 4 long put long call put + call FIGURE 0.5 Pre-maturity payo diagram for a long put with strike K1 and a long call with strike K2, K1 K2. iii Payo diagram before expiration: 0 1 2 3 4 5 6 7 8 9 10 −6 −4 −2 0 2 4 6 long put+short call short put+long call combined position FIGURE 0.6 Pre-maturity payo diagram for a (long put/short call) combination at K1 plus a (long call/short put) combination at K2 K1. 2. (a) Let N denote the notional amount of the swap and L12 and L18 the USD Libor rate at 12 months and 18 months respectively. The cash ows are given by 12 months 18 months 24 months Floating leg +N +N  L12 2 +N