Consider a model with A(0) = 1, A(1) = 1.2, S(0) = 35 and S(1) given...
Fantastic news! We've Found the answer you've been seeking!
Question:
Transcribed Image Text:
Consider a model with A(0) = 1, A(1) = 1.2, S(0) = 35 and S(1) given by 40 with probability p with probability q with probability 1-p-q S(1) = S 48 where p, q € (0, 1) and s is a nonnegative number. (a) Find s for which the model is arbitrage free? (b) Is a put option with strike price 44 replicable if s = 20 ? If so, what is its price? (c) Find s for which a call option with strike price 40 is replicable? For these s, find the price of the call option? Consider a model with A(0) = 1, A(1) = 1.2, S(0) = 35 and S(1) given by 40 with probability p with probability q with probability 1-p-q S(1) = S 48 where p, q € (0, 1) and s is a nonnegative number. (a) Find s for which the model is arbitrage free? (b) Is a put option with strike price 44 replicable if s = 20 ? If so, what is its price? (c) Find s for which a call option with strike price 40 is replicable? For these s, find the price of the call option?
Expert Answer:
Answer rating: 100% (QA)
a For the given model to be arbitrage free the following condition must be satisfied A1 S1 12 p40 qs ... View the full answer
Related Book For
Posted Date:
Students also viewed these mathematics questions
-
A Ford put option with strike price 60 trading on the Acme options exchange sells for $2. To your amazement, a Ford put with the same maturity selling on the Apex options exchange but with strike...
-
A FinCorp put option with strike price 60 trading on the Acme options exchange sells for $2. To your amazement, a FinCorp put with the same maturity selling on the Apex options exchange but with...
-
Consider a model with two countries called France and Germany. France has one automaker, called Citroen. Germany has a competitor company, called Volkswagen. Citroen can produce cars at a constant...
-
11. Which one is not a source for collecting references? Ans : O Proquest Ebscohost O Scopus Safe assign
-
For what reasons do businesses withhold funds from their employees pay?
-
Scatter Diagrams and High-Low Cost Estimation From April 1 through October 31, Will County Highway Department hires temporary employees to mow and clean the right-of-way along county roads. The...
-
In 2008 the City of Chicago agreed to lease 35,000 parking meters to a Morgan Stanley-led partnership Morgan Stanley for a one-time sum of \($1.15\) billion. The lease has been criticized as an...
-
According to a 2013 study by the Pew Research Center, 15% of adults in the United States do not use the Internet (Pew research Center website, December, 15, 2014). Suppose that 10 adults in the...
-
Kristen Lu purchased a used automobile for $12,300 at the beginning of last year and incurred the following operating costs: Depreciation ($12,300 5 years) Insurance Garage rent Automobile tax and...
-
You have been assigned to compute the income tax provision for Motown Memories, Inc. (MM) as of December 31, 2017. The Companys federal income tax rate is 34%. The Companys Income Statement for 2017...
-
ABC Retailers ABC Retailers Inc. (ABC or the "Company") is a U.S. public company that files quarterly and annual reports with the Securities and Exchange Commission (SEC) with a fiscal year end of...
-
What are ten different types of sensors?
-
What source documents are used in assigning manufacturing costs to work in process inventory?
-
Are Industry 4 .0 and the Fourth Industrial Revolution possible without cyberphysical systems?
-
What is the difference between Industry 4.0, Industrie 4.0, and the Fourth Industrial Revolution?
-
How is under- or overapplied manufacturing overhead reported in monthly financial statements?
-
27 2 points Builder Products, Incorporated, uses the weighted-average method in its process costing system. It manufactures a caulking compound that goes through three processing stages prior to...
-
An interest bearing promissory note for 90 days at 5.6% p.a. has a face value of $120,000. If the note is discounted 20 days after the issue date at a rate of 6.8% p.a., calculate the amount of...
-
Oligopoly, Increasing Returns, Tariffs and FD/. Recall from Chapter 3 that one motivation for setting up a branch plant in a foreign country is to avoid transport costs and tariffs, but this has to...
-
Suppose we can take as given an empirical finding that increased trade openness reduces child labor somewhat in the export sectors and increases it somewhat in import-competing sectors. Can you think...
-
Recall from Section 16.2 that a country can have a trade surplus or a trade deficit even in a static model if there is some sort of international transfer. Think of three real-world examples of such...
-
Assume that locational arbitrage ensures that spot exchange rates are properly aligned. Also assume that you believe in purchasing power parity. The spot rate of the British pound is $1.80. The spot...
-
The U.S. 3-month interest rate (unannualized) is 1 percent. The Canadian 3-month interest rate (unannualized) is 4 percent. Interest rate parity exists. The expected inflation over this period is 5...
-
Todays spot rate of the Mexican peso is $.10. Assume that purchasing power parity holds. The U.S. inflation rate over this year is expected to be 7 percent, while the Mexican inflation over this year...
Wealth A Must The Ultimate Guide On Financial Freedom 1st Edition - ISBN: 979-8365713055 - Free Book
Study smarter with the SolutionInn App