In a simple market one-period binomial tree model, we know that the simple compounding annual effective...
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In a simple market one-period binomial tree model, we know that the simple compounding annual effective interest rate is given by i = 8%. The stock price satisfies S(0) = 65 and S(1): = 80, with probabilit p, 40, with probabilit 1 - p, where 0 < p < 1. (a) Let us consider a Put option written on this stock with the strike price 60 and the maturity time T = 1. Find the initial price P(0) of this Put option. (b) Let us consider a Call option written on the Put option in part (a) with the strike price K = 10, i.e., the holder of this Call option has the right to get the payoff of the Put option in part (a) by paying the strike price K = 10. Find the initial price C(0) of this "call on put" option by constructing replication portfolio using stock and bank account. In a simple market one-period binomial tree model, we know that the simple compounding annual effective interest rate is given by i = 8%. The stock price satisfies S(0) = 65 and S(1): = 80, with probabilit p, 40, with probabilit 1 - p, where 0 < p < 1. (a) Let us consider a Put option written on this stock with the strike price 60 and the maturity time T = 1. Find the initial price P(0) of this Put option. (b) Let us consider a Call option written on the Put option in part (a) with the strike price K = 10, i.e., the holder of this Call option has the right to get the payoff of the Put option in part (a) by paying the strike price K = 10. Find the initial price C(0) of this "call on put" option by constructing replication portfolio using stock and bank account.
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a P0 100 050 050 We know that the value of the Put option at time T is given by PT max0 KST where K ... View the full answer
Related Book For
Microeconomics An Intuitive Approach with Calculus
ISBN: 978-0538453257
1st edition
Authors: Thomas Nechyba
Posted Date:
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