Erratum: “Solutions for Problem Set 8…”

HT to TJ Brooks for identifying various typos in my solutions for Problem Set 8. In the solutions for the 3rd and 4th questions, I mistakenly identified the put payoff at the down node having a value of 16, which is incorrect; the correct value is 12. However, all of the answers are correct and are based upon p(d) having a value of 12. I have corrected these typos so the version of the solutions for this problem set are now error-free.

Midterm exam 2 information…

Midterm 2 will be given during class on Tuesday, April 3. 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 pertain to topics which we have covered since the first midterm exam. Topics covered include 1) demand for insurance, 2) adverse selection, 3) portfolio/capital market theory, and 4) financial derivatives (calls and puts specifically).  I have posted the formula sheet that will appear as the back page of the exam booklet at the following location:

Tomorrow’s class meeting will be devoted to a review session for the midterm exam. If you haven’t already done so, I highly recommend that you review Problem Sets 5-8 and also try working the Sample Midterm 2 Exam (solutions are also provided) prior to coming to class tomorrow.  I will come to class prepared to work through the solutions for Problem Set 8 and the sample exam, as well as address any questions or concerns that y’all may have.

Erratum – new version of problem set 8 now available at

One of your fellow classmates (who will remain unnamed :-)) pointed out to me that as originally written, problem set 8 asked for solving the value of a call option using the delta hedging approach.  Since I did not cover delta hedging, I have modified the problem (just moments ago) so that it now asks for calculating call and put values using replicating portfolio and risk neutral valuation approaches.  So if you have previously downloaded the problem set before now, delete that copy and re-download the corrected version, which looks like this:

Finance 4335