1. Consider the N-step binomial asset pricing model with 0 < d ...
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1. Consider the N-step binomial asset pricing model with 0 < d <1+r<u. (a) Assume N = 4, So = 100, r = 0.010, u = 1.07, and d = 0.94. Calculate the price at time zero, Vo, of the American put-option with strike price K 102 and give the optimal exercise = strategy (as a stopping time). (b) At time zero you sell the American put option from part (a) for Vo. However, the long-party treats the option as if it a European put and waits until time N = 4 to make an exercise decision. In this scenario how much can you consume, and when, from your hedging portfolio and still cover the payoff of the option at expiry? 1. Consider the N-step binomial asset pricing model with 0 < d <1+r<u. (a) Assume N = 4, So = 100, r = 0.010, u = 1.07, and d = 0.94. Calculate the price at time zero, Vo, of the American put-option with strike price K 102 and give the optimal exercise = strategy (as a stopping time). (b) At time zero you sell the American put option from part (a) for Vo. However, the long-party treats the option as if it a European put and waits until time N = 4 to make an exercise decision. In this scenario how much can you consume, and when, from your hedging portfolio and still cover the payoff of the option at expiry?
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a To calculate V0 the price of the American putoption at time zero we need to ... View the full answer
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