A strike reset put allows the option holder to reset the strike price once during the life of the option. In other words if the put initially has expiration date T and strike price K and you choose to reset the strike price at time t you now have put with expiration date T and strike price S(t).

If you reset the strike at time t then your payoff at time T is given by max{S(t)−S(T),0} . So the value of resetting the strike at time t is the price of an at the money European put option with strike price S(t) and time to expiration T-t.  Explain how you could determine the reset boundary and the price of the strike reset put in a binomial tree. Focus on the differences compared to pricing a standard option on a binomial tree.

Answer rating: 100% (QA)

ANSWRT IS To determine the reset boundary and the price of the strike reset put in a binomial tree we can follow these steps Set up the binomial tree ... View the full answer