Consider a two-step binomial model (left(S_{k} ight)_{k=0,1,2}) with interest rate (r=0 %) and risk-neutral probabilities (left(p^{*}, q^{*}
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Consider a two-step binomial model \(\left(S_{k}\right)_{k=0,1,2}\) with interest rate \(r=0 \%\) and risk-neutral probabilities \(\left(p^{*}, q^{*}\right)\) :
a) At time \(t=1\), would you exercise the American put option with strike price \(K=1.25\) if \(S_{1}=1.2\) ? If \(S_{1}=0.9\) ?
b) What would be your investment allocation at time \(t=0\) ?
Transcribed Image Text:
p* = 2/3 S = 1.44 S = 1.2 p* = 2/3 So = 1 q* = 1/3 q* = 1/3 p* = 2/3 S = 1.08 S = 0.9 q* = 1/3 S = 0.81
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Related Book For
Introduction To Stochastic Finance With Market Examples
ISBN: 9781032288277
2nd Edition
Authors: Nicolas Privault
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