Work the Bermuda option Problem 5 of Chapter 4 assuming prices follow a symmetric differential IG model, use equation (6.39). Be sure to report your model’s parameters.

Data given in problem 5

Price a 90 day 100 strike Bermudian option with 15 day early exercise periods. Assume r = 1 % and σ = 20 %. Use the binomial tree solution method. Plot the price of the option versus originating stock price. Compare the graph with that of its European counterpart.

Data given in equation 6.39

Transcribed Image Text:

dS₁ = rf St_dt + St_dZt. (6.39)