Bring a calculator (it doesn’t have to be a financial calculator) and a pencil, or two, to the exam. Computers, books, and phones can’t be used during the exam.
1. The exam will include: a) two strategies for which you generate the profit diagrams and explain their merits and relative merits (e.g. the problems on pp. 73, 74, and 337-338), b) one of the 3 price boundary conditions where you explain how to arbitrage them or determine an untraded option price (e.g. #4, 5A and 5B on pp. 110, #18A on p. 115, 18D on p. 116, #19A and 19D on p. 117, and # 30-35 on pp. 120 - 121), c) pricing spot options using the binomial opm stock price decomposition method (either one without changing parameters such as those on pp. 196-203 or one with changing parameters such as those on pp. 213-215) and d) derive/prove the B-S opm using the R-N approach as in Hull (8th ed., pp. 329-331.) There may also be some other problem-solving questions and there will likely be some conceptual questions (e.g. Should you use options or futures to hedge? How can profit diagrams be “interest-adjusted” and what is the likely effect on apparent arbitrage opportunities of making the profit diagrams “interest-adjusted”? When is it appropriate to use a European opm to price an American option? Explain the comparative static effects of changes in the 5 parameters on the “unmodified for dividends” B-S opm prices. In what ways is the B-S opm less general than the binomial opm?).
2. Problem-solving questions will be as short as possible to test the idea. There will be no B-S option price or spreadsheet style (very repetitive, though more realistic) calculations.
3. The exam should broadly test your knowledge given the time constraint (i.e. you only have your regular class time to complete the exam), so the questions should cover different topics.…