Demonstrate work that does not utilize linear algebra

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Reference no: EM131977718

Question: You are given the following information about a securities market:

(i) There are two nondividend-paying stocks, X and Y.

(ii) The current prices for X and Y are both $100.

(iii) The continuously compounded risk-free interest rate is 10%.

(iv) There are three possible outcomes for the prices of X and Y one year from now:

Outcome	X	Y
1	$200	$0
2	$50	$0
3	$200	$300

Let C_X be the price of a European call option on X, and P_Y be the price of a European put option on Y. Both options expire in one year and have a strike price of $95. Calculate P_Y - C_X

NOTES: This is a problem almost identical to a problem from the MFE Fall 2008 exam, but a value (Outcome 3 X Price) has been changed. Also, we have not used any linear algebra (directly) in this class so I need to be able to demonstrate work that doesn't utilize linear algebra, if that's possible.

Reference no: EM131977718

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