Repeat the previous problem, only assume that the options trader purchases 1000 1-year at-the-money straddles.
Answer to relevant QuestionsRefer to Table 19.1. a. Verify the regression coefficients in equation (19.12). b. Perform the analysis for t = 1, verifying that exercise is optimal on paths 4, 6, 7, and 8, and not on path 1. The Black-Scholes price for a European put option with S = $40, K = $40, σ = 0.30, r = 0.08, δ = 0, and t = 0.25 is $1.99. Use Monte Carlo to compute this price. Compute the standard deviation of your estimates. How many ...The formula for an infinitely lived call is given in equation (12.18). Suppose that S follows equation (20.20), with α replaced by r, and that E* (dV ) = rV dt. Use Itˆo’s Lemma to verify that the value of the call, V ...Suppose that S follows equation (20.36) and Q follows equation (20.37). Use Itˆo’s Lemma to find the process followed by S2Q0.5. You are offered the opportunity to receive for free the payoff [Q(T ) − F0,T (Q)]× max[0, S(T ) − K]
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