== Consider the binomial pricing model example with So = 4, u = 2, d =...
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== Consider the binomial pricing model example with So = 4, u = 2, d = 0.5 and r = = 0.25 per period. Let the strike of a call option K = 3.5 and it expires at time 2 (two period case). a) Assume that you are the writer of the option and sell it to someone else at time 0 for the premium. b) Buy the appropriate number of shares & using the received premium and borrowing money if necessary c) Depending on the coin tosses, adjust your stock position and the money market position d) At time 2 demonstrate how you replicate the option payoff in all scenarios. == Consider the binomial pricing model example with So = 4, u = 2, d = 0.5 and r = = 0.25 per period. Let the strike of a call option K = 3.5 and it expires at time 2 (two period case). a) Assume that you are the writer of the option and sell it to someone else at time 0 for the premium. b) Buy the appropriate number of shares & using the received premium and borrowing money if necessary c) Depending on the coin tosses, adjust your stock position and the money market position d) At time 2 demonstrate how you replicate the option payoff in all scenarios.
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a As the writer of the call option you receive the premium upfront in exchange for giving the buyer ... View the full answer
Related Book For
Microeconomics An Intuitive Approach with Calculus
ISBN: 9780538453257
1st edition
Authors: Thomas Nechyba
Posted Date:
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