a) Write the payoff of the European call option with strike price K. b) Assume d = 5, r = 0.2, d₁ = 3, d₂ = 8, K = 7. Find the price of the option. c) Find the replicating strategy for the option.
a) Write the payoff of the European call option with strike price K. b) Assume d = 5, r = 0.2, d₁ = 3, d₂ = 8, K = 7. Find the price of the option. c) Find the replicating strategy for the option.
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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Question
![Consider a financial market consisting of a bank account So(t) and a stock S₁ (t) modelled on a
probability space (2, F, P) with the time indices t = 0, 1, 2, ..., T.
consider a one period financial market model with T = 1,
S = {w₁, W₂}, F is the collection of all events and P is a probability measure such that P({w₁}) >
0, P({₂}) > 0. Assume that So(0) = 1, S₁ (0) = d> 0 and
So(1,₂)= (1+r)
So(1, ₁) =
S₁(1, ₁) =
S₁ (1, ₂) =
where 0 < d <d₂. r> 0 is the interest rate.
Question:
d₁,
d₂,
a) Write the payoff of the European call option with strike price K.
b) Assume d = 5, r = 0.2, d₁ = 3, d₂ = 8, K = 7. Find the price of the option.
c) Find the replicating strategy for the option.](/v2/_next/image?url=https%3A%2F%2Fcontent.bartleby.com%2Fqna-images%2Fquestion%2F0fe47844-ccd9-47f2-b4da-7acecef93fac%2F8d18d9aa-4bb6-4e72-b668-b5494ef449bf%2Frlykfv_processed.png&w=3840&q=75)
Transcribed Image Text:Consider a financial market consisting of a bank account So(t) and a stock S₁ (t) modelled on a
probability space (2, F, P) with the time indices t = 0, 1, 2, ..., T.
consider a one period financial market model with T = 1,
S = {w₁, W₂}, F is the collection of all events and P is a probability measure such that P({w₁}) >
0, P({₂}) > 0. Assume that So(0) = 1, S₁ (0) = d> 0 and
So(1,₂)= (1+r)
So(1, ₁) =
S₁(1, ₁) =
S₁ (1, ₂) =
where 0 < d <d₂. r> 0 is the interest rate.
Question:
d₁,
d₂,
a) Write the payoff of the European call option with strike price K.
b) Assume d = 5, r = 0.2, d₁ = 3, d₂ = 8, K = 7. Find the price of the option.
c) Find the replicating strategy for the option.
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