Replication via Forward Contracts. In the 1-step binomial model, replicate the option payoff at expiration via (Q_{0})
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Replication via Forward Contracts. In the 1-step binomial model, replicate the option payoff at expiration via \(Q_{0}\) amount of a forward contract with delivery price of \(K_{0}\).
(a) Solve for \(Q_{0}, K_{0}\)
\[Q_{0}\left(A_{u}-K_{0}ight)=C_{u}, \quad Q_{0}\left(A_{d}-K_{0}ight)=C_{d}\]
(b) Compute today's value of the above replicating forward contract: \(Q_{0} \times V F_{A}\left(0, T, K_{0}ight)\).
(c) Is \(C_{0}=Q_{0} \times V F_{A}\left(0, T, K_{0}ight)\) the same as Formula 5.3?
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Related Book For
Mathematical Techniques In Finance An Introduction Wiley Finance
ISBN: 9781119838401
1st Edition
Authors: Amir Sadr
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