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\noindent{\bf Math 496/889 \hfill Quiz 1 \hfill Name:\rule{5.cm}{.25mm}} \\
\noindent{\bf Friday, August 29, 2003 \hfill SSN:\rule{5.cm}{.25mm}}\\
\bigskip
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Problem & 1 & 2 & 3 & 4 & 5 & 6 & Total\\
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Possible& 3 & 3 & 3 & 3 & 3 & 3 & 20 \\
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Points & & & & & & & \\
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\end{tabular}
\begin{enumerate}
\item (3 points) Name the French mathematician who initiated the
mathematical modeling of financial markets and speculation, and the
approximate time that modeling was done.
\emph{ Louis Bachelier, in his thesis of 1900.}
\vspace{1in}
\item (3 points) What was the most important development in
mathematical finance in the last half of the 20th century in that it
profoundly influenced actual financial practice, and single-handedly
created an entire area of academic research?
\emph{ The Black-Scholes model for option pricing.}
\vspace{1in}
\item (3 points) List three reasons that mathematical financial
models were quickly adopted into financial practice starting in the
1970's and continuing to the present.
\emph{
\begin{enumerate}
\item increased volatility starting in the 70's
\item creationof the derivative security markets starting n 1973
\item de-regulation of financial markets, allowing innovation of products
\item development of computer hardware, and telecommunications allowing
simulation and solution of models.
\end{enumerate}
}
\vspace{1in}
\item (3 points) What is a European put option?
\emph{ The right to sell an asset at a specified price (called the strike
price) on a specified day (called the expiration time).}
\vspace{.5in}
\item (3 points) What is an American call option?
\emph{ The right to buy an asset at a specified price (called the strike
price) on or before a specified time.}
\vspace{.5in}
\item (5 points) You have purchased a September call option on on
Intel stock. The strike price is \$27.50. This option cost you
\$0.45. The current value of Intel stock is \$26.36. What value
must Intel stock have in order for you to see a profit on this
option? Ignore for the purposes of this first quiz the time value
of money. (This information was valid on August 20, 2003).
\emph{ The stock should be at \$27.95 or above to make a profit.}
\end{enumerate}
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