An agricultural producer wishes to insure the value of a crop. Let Q represent the quantity of production in bushels and S the price of a bushel. The insurance payoff is therefore Q(T ) × V [S(T ), T ], where V is the price of a put with K = $50. What is the cost of insurance?
Answer to relevant QuestionsVerify that ASaeγ t satisfies the Black-Scholes PDE for Use the answers to the previous two problems to verify that the Black-Scholes formula, equation (12.1), satisfies the Black-Scholes equation. Verify that the boundary condition V [S(T), T ]= max[0, S(T ) − K] is satisfied. The box on page 282 discusses the following result: If the strike price of a European put is set to equal the forward price for the stock, the put premium increases with maturity. a. How is this result related to Warren ...We now use Monte Carlo to simulate the behavior of the martingale Pt/St , with St as numeraire. Let x0 = P0(0, T )/S0. Simulate the process xt + h= (1+ σ√hZt+h)xtLet h be approximately 1 day. a. Evaluate S0E_ PT (T , T ...A European shout option is an option for which the payoff at expiration is max(0, S − K, G − K), where G is the price at which you shouted. (Suppose you have an XYZ shout call with a strike price of $100. Today XYZ is ...
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