Some helpful hints about Part 4 of Problem Set 4

Part 4 of problem 4 requires that you use Derivagem, which is a Visual Basic powered Excel spreadsheet. If you purchased one of the $200+ books at the campus bookstore, probably this was included on a CD located on the back cover of the book. However, if you purchased your copy of the textbook online, then you might not have this software. Not to worry; this software is available as a free download from http://www-2.rotman.utoronto.ca/~hull/software/DerivaGem.zip. Professor Hull also provides a video which explains how to use Derivagem – see http://www.screencast.com/t/fcD5cs2y. As an alternative to Derivagem, you may either build an Excel spreadsheet or use the one that I created for pricing European options on dividend paying stocks for solving question 5 on the problem set 4.

Finally, note that 3rd part of this problem requires that you use the version of the put-call parity equation that includes dividends. The version of put-call parity for European options with dividends is given by equation 9.7 in Hull 7th and prior editions (including the international editions); in the 8th edition, the equation number is 10.10, and in the 9th edition, the equation number is 11.10. Basically, with dividends, all you have to do is include the present value of dividends on the left-hand side of the put-call parity equation.

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