Question: Consider a model with A(0) = 1, A(1) = 1.2, S(0) = 35 and S(1) given by 40 with probability p with probability q

Consider a model with A(0) = 1, A(1) = 1.2, S(0) =

Consider a model with A(0) = 1, A(1) = 1.2, S(0) = 35 and S(1) given by 40 with probability p with probability q with probability 1-p-q S(1) = S 48 where p, q (0, 1) and s is a nonnegative number. (a) Find s for which the model is arbitrage free? (b) Is a put option with strike price 44 replicable if s = 20 ? If so, what is its price? (c) Find s for which a call option with strike price 40 is replicable? For these s, find the price of the call option?

Step by Step Solution

★★★★★

3.51 Rating (161 Votes )

There are 3 Steps involved in it

1 Expert Approved Answer

Step: 1 Unlock

a For the given model to be arbitrage free the following condition must be satisfied A1 S1 12 p40 qs ... View full answer

Question Has Been Solved by an Expert!

Get step-by-step solutions from verified subject matter experts

Step: 2 Unlock

Step: 3 Unlock

Students Have Also Explored These Related Mathematics Questions!

A Ford put option with strike price 60 trading on the Acme options exchange sells for $2. To your amazement, a Ford put with the same maturity selling on the Apex options exchange but with strike...

A FinCorp put option with strike price 60 trading on the Acme options exchange sells for $2. To your amazement, a FinCorp put with the same maturity selling on the Apex options exchange but with...

Consider a model with two countries called France and Germany. France has one automaker, called Citroen. Germany has a competitor company, called Volkswagen. Citroen can produce cars at a constant...

BlackScholes and Collar Cost An investor is said to take a position in a collar if she buys the asset, buys an out-of-the-money put option on the asset, and sells an out-of-the-money call option on...

In this problem, we shall outline a form of robust linear regression. Assume throughout the exercise that the data consist of pairs (Yi, xi) for i = 1, . . . , n. Assume also that the xi s are all...

The population y (in thousands) of Buffalo, New York, from 2000 to 2014 can be approximated by the model y = 2.60t + 291.7, 0 ¤ t ¤ 14, where t represents the year, with t = 0...

In Chapter 6, the model for an HIV/AIDS patient treated with RTIs was linearized and shown to be It is assumed here that the patient will be treated and monitored using the closed-loop configuration...

(Finding rf ) In a binomial model a European put option is written on a stock selling today for $30. The exercise price of the put option is $40. The put options payoffs are $20 and $5. The price of...

1. Construct a MATLAB function to compute the new parameters of the Merton model under the change of measure defined by Ub,, with (x) = 0 + 1x and b R. Use the same notations as in Section 6.2.3.

8.16. Suppose that (a) X is Bernoulli with PrX 1 1 PrX 0 p, and (b) Y given X j is normal with mean mj, variance s2, a simple form of the discriminant analysis model. Consider now the monotone...

Precision Unimart Manufacturing Beginning inventory Merchandise 304,000 Finished goods 608,000 Cost of purchases 540 000 Cost of goods manufactured 920 000 Ending inventory Merchandise 204,0001...

Flyaway Rural Airlines is planning to add the following three aitcraft to its fleet, an Airbus, a Boeing and an fimbraer, with the following characteristic: Part A: Calculate the weighted average...

Nithya is setting up QuickBooks Online for the first time. When would she enter an opening balance? Select an answer: when a customer has a balance in her previous accounting system when she wants to...

You are a chairperson of source selection, evaluation board for a new jet engine. You had to brief a SSEB member on the procedures for protecting source selection, information what procedures would...

Hi-Tech Commerce Co. (HTC) sells and provides service of efficient end-to-end communications and IT systems and solutions. One of the company's key products and services includes Telecom and IT...

2) See each part for the question to answer. a) Paulette is looking to decide which of two online ad campaigns (lets call them A and B) would generate the highest purchase conversion. Describe how...

Len Kumar started his own consulting firm, Kumar Consulting, on June 1, 2017. The trial balance at June 30 is as follows KUMAR CONSULTING Trial Balance June 30, 2017 Debit Credit $ 6,850 7,000 1,977...

An interest bearing promissory note for 90 days at 5.6% p.a. has a face value of $120,000. If the note is discounted 20 days after the issue date at a rate of 6.8% p.a., calculate the amount of...

Oligopoly, Increasing Returns, Tariffs and FD/. Recall from Chapter 3 that one motivation for setting up a branch plant in a foreign country is to avoid transport costs and tariffs, but this has to...

Suppose we can take as given an empirical finding that increased trade openness reduces child labor somewhat in the export sectors and increases it somewhat in import-competing sectors. Can you think...

Recall from Section 16.2 that a country can have a trade surplus or a trade deficit even in a static model if there is some sort of international transfer. Think of three real-world examples of such...

An experiment to determine the effect of several methods of preparing cultures for use in commercial yogurt was conducted by a food science research group. Three batches of yogurt were prepared using...

The intern from the marketing department at the Holes R Us online piercing salon (Chapter 3, Exercise 55) has recently finished a study of the company's 500 customers. He wanted to know whether...

Are there fundamental differences between liberal arts colleges and universities? In this case, we have information on the top 25 liberal arts colleges and the top 25 universities in the Unites...