Consider a one step binomial tree for the portfolio II = AS-NB which is long A...
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Consider a one step binomial tree for the portfolio II = AS-NB which is long A shares and short N bonds and the interest rate r is constant. Assume that the portfolio must replicate the value of an option Vo at time t= 0, such that at time T. V is the value of the option if the share price moves up, and V is the value if share price moves down. Derive the two equations for the value of the portfolio that replicates the value of the option when the share price moves up or down. Solve these equations to find the value of A and N, and use the fact that two investments with the same payoff must have the same value to derive a formula for Vo Consider a one step binomial tree for the portfolio II = AS-NB which is long A shares and short N bonds and the interest rate r is constant. Assume that the portfolio must replicate the value of an option Vo at time t= 0, such that at time T. V is the value of the option if the share price moves up, and V is the value if share price moves down. Derive the two equations for the value of the portfolio that replicates the value of the option when the share price moves up or down. Solve these equations to find the value of A and N, and use the fact that two investments with the same payoff must have the same value to derive a formula for Vo
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First well derive the equations for the value of the portfolio that replicates the value of the option when the share price moves up and down When the ... View the full answer
Related Book For
Income Tax Fundamentals 2013
ISBN: 9781285586618
31st Edition
Authors: Gerald E. Whittenburg, Martha Altus Buller, Steven L Gill
Posted Date:
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