Question 6 Please

sses for the call and put options, respectively (cf. Exercise 4) free price proce Show that the following call-put parity relation holds: (2.66) Ct - P Si - K/(1 +r)-t, t 0, 1,...,T -1. Note, you can show this using either a "no arbitrage" argument or the formulas for Ct, Pt resulting from Exercise 3. 6. Consider a CRR model with T 2, So $100, S1 $200 or S $50 (the same model as in Exercise 2). Now consider an American put option with strike price K $120. Assume that the risk free interest rate is r 0.1. (a) Use a binary tree to compute the arbitrage free initial price of the American put option. (b) Determine an explicit superhedging strategy ?* for this option. (c) Suppose that you can buy the American put option at time zero for $1 less than its arbitrage free price. Explicitly describe a strategy that yields an arbitrage opportunity for a buyer of the American put option. d) Try to automate the arbitrage free pricing of an American put option in a computer program where T, So, u, d and K are variables. sses for the call and put options, respectively (cf. Exercise 4) free price proce Show that the following call-put parity relation holds: (2.66) Ct - P Si - K/(1 +r)-t, t 0, 1,...,T -1. Note, you can show this using either a "no arbitrage" argument or the formulas for Ct, Pt resulting from Exercise 3. 6. Consider a CRR model with T 2, So $100, S1 $200 or S $50 (the same model as in Exercise 2). Now consider an American put option with strike price K $120. Assume that the risk free interest rate is r 0.1. (a) Use a binary tree to compute the arbitrage free initial price of the American put option. (b) Determine an explicit superhedging strategy ?* for this option. (c) Suppose that you can buy the American put option at time zero for $1 less than its arbitrage free price. Explicitly describe a strategy that yields an arbitrage opportunity for a buyer of the American put option. d) Try to automate the arbitrage free pricing of an American put option in a computer program where T, So, u, d and K are variables