Let S, be the price of a stock at time n. The payoff V of a...
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Let S, be the price of a stock at time n. The payoff V₂ of a European security is: V2= max(So, S1, S2) Today's stock price is equal to So= $40. At each time the stock price can either go up or down. If it goes up, it is multiplied by u 1.1. If it goes down, it is multiplied by d = 1/u. The time-step is At = 1, and the risk-free interest. rate is equal to 0%. a) Show that Var[S₁ - So)]=o²S3, with = 0.095 b) Use the binomial model to calculate the value Vo of this European security. Be careful: the model is path-dependent, i.e., V2 (HT) + V₂(TH). Let S, be the price of a stock at time n. The payoff V₂ of a European security is: V2= max(So, S1, S2) Today's stock price is equal to So= $40. At each time the stock price can either go up or down. If it goes up, it is multiplied by u 1.1. If it goes down, it is multiplied by d = 1/u. The time-step is At = 1, and the risk-free interest. rate is equal to 0%. a) Show that Var[S₁ - So)]=o²S3, with = 0.095 b) Use the binomial model to calculate the value Vo of this European security. Be careful: the model is path-dependent, i.e., V2 (HT) + V₂(TH).
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The question provided contains a twopart problem related to a European security based on the price of a stock at different times Lets address each part one by one a Show that VarS1 S0 sigma2 S02 with ... View the full answer
Related Book For
Introduction to Management Science A Modeling and Cases Studies Approach with Spreadsheets
ISBN: 978-0078024061
5th edition
Authors: Frederick S. Hillier, Mark S. Hillier
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