. (Replicating strategy for pricing) To price a derivative, we can use risk-neutral pricing. As an alternative yet equivalent method, we can construct price the derivative using replicating strategies. Consider a 1-period binomial model, where we have three nodes No,0, N1,0, N1,1. We have a cash account with fixed interest rate r = 0.01 - that is, if we have at No,o cash account with D dollars, we expect (1 + r)D at either N1,0 or N1,1. We also have a stock with price S0,0 = 10 at No,0, S1,0 = 8 at N1,0 and $1,1 = 15 at N₁,1. Now consider an European call option at time t = 1 with strike K = 12. Can you price the option at No,o using a replicating strategy, and what is the price? Please submit your answer rounded to only one decimal digit - for example if your answer is 1.28, then submit 1.3. If your answer is 1.12, submit 1.1.
. (Replicating strategy for pricing) To price a derivative, we can use risk-neutral pricing. As an alternative yet equivalent method, we can construct price the derivative using replicating strategies. Consider a 1-period binomial model, where we have three nodes No,0, N1,0, N1,1. We have a cash account with fixed interest rate r = 0.01 - that is, if we have at No,o cash account with D dollars, we expect (1 + r)D at either N1,0 or N1,1. We also have a stock with price S0,0 = 10 at No,0, S1,0 = 8 at N1,0 and $1,1 = 15 at N₁,1. Now consider an European call option at time t = 1 with strike K = 12. Can you price the option at No,o using a replicating strategy, and what is the price? Please submit your answer rounded to only one decimal digit - for example if your answer is 1.28, then submit 1.3. If your answer is 1.12, submit 1.1.
Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
Problem 1PS
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Transcribed Image Text:5. (Replicating strategy for pricing)
To price a derivative, we can use risk-neutral pricing. As an alternative yet equivalent method, we can construct
price the derivative using replicating strategies.
Consider a 1-period binomial model, where we have three nodes No.0, N1.0, N1.1. We have a cash account with
fixed interest rate r = 0.01 - that is, if we have at No.0 cash account with D dollars, we expect (1+ r)D at either
N1.0 or N1.1. We also have a stock with price S0.0
10 at No,0, S1,0 = 8 at N1,0 and S1,1
= 15 at N1,1.
Now consider an European call option at time t = 1 with strike K = 12. Can you price the option at No.0 using a
replicating strategy, and what is the price?
Please submit your answer rounded to only one decimal digit - for example if your answer is 1.28, then submit 1.3.
If your answer is 1.12, submit 1.1.
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