Verify in Example 23.12 that you obtain the same answer if you use x0Q0 as the stock price, δQ+ ρsσQ + r − rf as the dividend yield, r as the interest rate, and σQ as the volatility.
Answer to relevant QuestionsIn this problem you will price various options with payoffs based on the Eurostoxx index and the dollar/euro exchange rate. Assume thatQ= 2750 (the index), x = 1.25 ($/=C), s = 0.08 (the exchange rate volatility), σ = 0.2 ...Compute January 12 2004 implied volatilities using the average of the bid and ask prices for IBM options expiring February 21 (use the Black-Scholes implied volatility function). Compare your answers to those in the previous ...Repeat Problem 24.16, except let αJ = 0.20, and in part (b) consider expected alternate jump magnitudes of 0.10 and 0.50. The following two problems both use the CEV option pricing formula. Assume in both that S = $100, r = ...Use the same inputs as in the previous problem. Suppose that you observe a bid option price of $50 and an ask price of $50.10. a. Explain why you cannot compute an implied volatility for the bid price. b. Compute an implied ...You are going to borrow $250m at a floating rate for 5 years. You wish to protect yourself against borrowing rates greater than 10.5%. Using each tree, what is the price of a 5-year interest rate cap? (Assume that the cap ...
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