Midterm Exam 2 information

Midterm 2 will be given during class on Thursday, November 2. This test consists of 4 problems. You are only required to complete 3 problems. At your option, you may complete all 4 problems, in which case I will throw out the problem on which you receive the lowest score.

The questions involve topics which we have covered since the first midterm exam. I expect my Finance 4366 students to demonstrate mastery concerning how arbitrage-free prices for European and American call and put options obtain within the binomial framework. Irrespective of the framework you apply (e.g., delta hedging, replicating portfolio, or risk neutral valuation), prices obtained via these methods are arbitrage-free in the sense that if the market price is not equal to the arbitrage-free price, then you can earn riskless trading profits without having to commit any of your own capital (no wonder hedge funds are such a popular asset class! :-)). Other than the binomial model, there’s also a question pertaining to the “Wiener Processes and Ito’s Lemma” readings and October 24th class discussion.

By the way, I have posted the formula sheet that I plan to use on the exam at the following location: http://fin4366.garven.com/fall2017/formulas_part2.pdf.

As I noted in my “Plans for next week in Finance 4366” blog posting, tomorrow’s class meeting will be devoted to a review session for midterm exam. If you haven’t already done so, I highly recommend that you review Problem Sets 6-8 and also try working the Sample Midterm 2 Exam (solutions are also provided) prior to coming to class tomorrow.

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