Consider the following SDE that governs asset prices in our model: dSt = Stdt + StdWt (24.59)
Question:
dSt = μStdt + σStdWt (24.59)
Assume that the risk-free interest rate is 3% and that there are no dividends in the model. Further, assume the current stock price is $70. Write a program that prices a one-year American put option struck at $55 in the above framework. Make sure that the optimal exercise decision is included in the tree.
Step by Step Answer:
The following code can be used to price an American ...View the full answer
An Introduction to the Mathematics of Financial Derivatives
ISBN: 978-0123846822
3rd edition
Authors: Ali Hirsa, Salih N. Neftci
Related Video
A put option is a financial contract that gives the owner the right, but not the obligation, to sell an underlying asset, such as a stock or a commodity, at a predetermined price, known as the strike price, on or before a specific date, known as the expiration date. Put options are used by investors as a form of insurance against a decline in the value of the underlying asset. If an investor expects the value of an asset to fall in the future, they can purchase a put option on that asset. If the value of the asset does fall, the put option will increase in value, allowing the investor to sell the asset at the higher strike price. For example, if an investor owns 100 shares of a stock that is currently trading at $50 per share, they may purchase a put option with a strike price of $45 and an expiration date three months in the future. If the stock price falls to $40 before the expiration date, the investor can exercise the put option and sell their shares for $45 each, even though the market price is only $40. This would allow the investor to limit their losses. It\'s important to note that purchasing a put option involves paying a premium to the seller of the option, and the investor can lose the entire premium if the price of the underlying asset does not decline as expected. Put options are just one type of financial derivative and should only be used by experienced investors who understand the risks involved.
Students also viewed these Finance questions
-
Consider the following SDE for St under the physical measure: dSt = dt + dWt. Write the corresponding dynamics under the risk-neutral measure, such that the discounted stock price is a martingale....
-
Consider the following SDE for the spot rate: drt = rtdWt. (a) Write a program that simulates a path for rt by simulating dWt. Assume r0 = 0.01, T = 2.0 and = 0.05. Calculate the expectation of the...
-
Consider the following SDE: (a) Write the above SDE in the integral form. (b) What is the value of theintegral. d(W) = 3 [W,dt +W dW]. widw, w;dw,-
-
According to the 1980 revisions to the Copyright Act of 1976,_____. a. the owner of a copyrighted program is allowed to make multiplecopies or adaptations for use on other computers b. copyright...
-
Assume a monopsonistic employer is paying a wage rate of Wm and hiring Qm workers, as indicated in Figure. Bilateral monopoly in the labor market. Now suppose an industrial union is formed that...
-
Let f(x) = [x] + [-x]. (a) For what values of does lim x a f(x) exist? (b) At what numbers is f discontinuous?
-
The following transactions occurred during the month for Mona Wade, CPA, PC: a. Wade opened an accounting firm by investing \($16,500\) cash and office furniture valued at \($5,300\). The business...
-
A large metropolitan health-care complex, General Hospital, has had difficulty controlling its accounts receivable. Costs currently available from the information system are inaccurate and have led...
-
Discuss the types of middleware for the integration of building systems. (12 marks) Demonstrate and explain the advantages and limitations of such middleware. (8 marks)
-
A U.S. company owns an 80% interest in a company located on Mars. Martian currency is called the Martian Credit. During the year the parent company sold inventory that had cost $24,000 to the...
-
Prove that if X1,X2, . . . are independent and identically distributed random variables having finite expectations, and if N is a stopping time for X1,X2, . . . such that E(N) -E(N)E(X) (24.58)
-
Knowing the log likelihood equation in the Kalman filter given by Eq. (25.67), use it to estimate the parameter of the linear model from the example done in the chapter.
-
1. What problems might have been encountered had the court ordered specific performance? 2. In what types of cases would specific performance be granted? McNamara, Justice Plaintiffs appeal from an...
-
Summarize the state of the SD-WAN and WAN Edge Infrastructure Marke with high level, hard-hitting points that a marketer in this space would care about. Explain what the opportunity is for Fortinet...
-
Explain how your value-based care would affect the organization's profitability, financial resources, and return on investment (ROI), while also addressing the rising costs of health care. How would...
-
A solid sphere of uniform density has a mass of 8.4 x 104 kg and a radius of 1.3 m. What is the magnitude of the gravitational force due to the sphere on a particle of mass 6.3 kg located at a...
-
"Barriers to communication can have a negative impact on how the message is transmitted and received. Discuss three barriers to communication and provide solutions on how these barriers can be...
-
Summarize how to manage login attempts with the OpenSSH sshd application.
-
Consider a perturbation to a two-level system with matrix elements where and are positive constants with the appropriate units. (a) According to first-order perturbation theory, if the system...
-
Assessing simultaneous changes in CVP relationships Braun Corporation sells hammocks; variable costs are $75 each, and the hammocks are sold for $125 each. Braun incurs $240,000 of fixed operating...
-
In South Carolina Palmetto Cash 5 lottery game, winning the jackpot requires that you select the correct 5 numbers between 1 and 38. How many different ways can those 5 numbers be selected?
-
Suppose you manage a firm with two production plants. The marginal product of labor at plant 1 is MP1 = 1400 - L1 where L1 is the number of workers employed in plant 1. The marginal product of labor...
-
Suppose a competitive firm produces spaghetti dinners. The market price of a spaghetti dinner is $20. The cost of making the dinners is given by C(Q) = 10Q + (Q2/160). The marginal cost is given by...
-
For the same vector, what is the x-component in terms of the angle and the magnitude E? Express your answer in terms of some or all of the variables o, E. View Available Hint(s) E = ? Submit Part D...
-
Here are three vectors in meters: a = 2.50 +3.60 + 3.60k = 2.00 4.00 + 2.00 = 2.00 +3.00 +1.00k What results from (a) d (d + d), (b) d (d2 d), and d (d2 + 73) ((c), (d) and (e) for , and I components...
-
Part E Let V = -6.0 +8.5 and 1 V = 4.5 + 4.4 . Determine the magnitude of V1+V2. Express your answer using two significant figures. |1+V2|= Submit Request Answer Part F Determine the direction of...
Study smarter with the SolutionInn App