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A one-year American call option on silver futures has an exercise price of $9.00. The current futures

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A one-year American call option on silver futures has an exercise price of $9.00. The current futures price is $8.50, the risk-free rate of interest is 12% per annum, and the volatility of the futures price is 25% per annum. Use the DerivaGem software with four three-month time steps to estimate the value of the option. Display the tree and verify that the option prices at the final and penultimate nodes are correct. Use DerivaGem to value the European version of the option. Use the control variate technique to improve your estimate of the price of the American option.
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In this case and The parameters for the tree are The tree output by DerivaGem for the Ameri...View the full answer


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Fundamentals of Futures and Options Markets

Fundamentals of Futures and Options Markets

ISBN: 978-0132993340

8th edition

Authors: John C. Hull

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A call option is a type of financial contract that gives the holder the right, but not the obligation, to buy an underlying asset (such as a stock, commodity, or currency) at a specified price (called the strike price) within a specified period of time. When an investor purchases a call option, they are essentially betting that the price of the underlying asset will rise above the strike price before the option\'s expiration date. If the price of the asset does rise above the strike price, the investor can exercise the option by buying the asset at the strike price and then selling it at the higher market price, thereby earning a profit. Call options are often used as a speculative investment strategy, as they allow investors to potentially profit from the upward movement of an asset without having to actually own the asset itself. They are also commonly used as a hedging tool to protect against potential losses in a portfolio.

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