The DerivaGem Application Builder functions enable you to investigate how the prices of options calculated from a

Question:

The DerivaGem Application Builder functions enable you to investigate how the prices of options calculated from a binomial tree converge to the correct value as the number of time steps increases. (See Figure 18.4 and Sample Application A in DerivaGem.) Consider a put option on a stock index where the index level is 900, the is 900, the risk-free rate is 5%, the yield is 2%, and the time to is 2 years
a. Produce results similar to Sample Application A on convergence for the situation where the option is European and the volatility of the index is 20%.
b. Produce results similar to Sample Application A on convergence for the situation where the option is American and the volatility of the index is 20%.
c. Produce a chart showing the pricing of the American option when the volatility is 20% as a function of the number of time steps when the control variate technique is used.
d. Suppose that the price of the American option in the market is 85.0. Produce a chart showing the implied volatility estimate as a function of the number of time steps. Strike Price
In finance, the strike price of an option is the fixed price at which the owner of the option can buy, or sell, the underlying security or commodity. Dividend
A dividend is a distribution of a portion of company’s earnings, decided and managed by the company’s board of directors, and paid to the shareholders. Dividends are given on the shares. It is a token reward paid to the shareholders for their... Maturity
Maturity is the date on which the life of a transaction or financial instrument ends, after which it must either be renewed, or it will cease to exist. The term is commonly used for deposits, foreign exchange spot, and forward transactions, interest...