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
D4
![Finance
Question 1
An up-and-out barrier call option with
barrier B, strike price K and exercise time T
has payoff
H(T) = (S(T) – K) + if max {S(t)| 0st<T} < B,
O otherwise,
that is, the payoff is that of a call option if
the underlying stock price does not reach
or exceed the barrier B at any time up to
and including time T, and 0 otherwise.
For an up-and-out barrier call option with
barrier B = 140, strike price K = 90 and
exercise timeT = 3 in the binomial model
with parameters U = 0.2, D = -0.1, R = 0.1
and S(0) = 100 compute the following.
(a) The option price at time 0;
%3D
%3D](/v2/_next/image?url=https%3A%2F%2Fcontent.bartleby.com%2Fqna-images%2Fquestion%2F08ab0eb3-e6bd-4cac-be71-f303fe00c8f5%2Feb50f8c3-4905-4785-b9c5-276babe29345%2Fxo6jnkh_processed.jpeg&w=3840&q=75)
Transcribed Image Text:Finance
Question 1
An up-and-out barrier call option with
barrier B, strike price K and exercise time T
has payoff
H(T) = (S(T) – K) + if max {S(t)| 0st<T} < B,
O otherwise,
that is, the payoff is that of a call option if
the underlying stock price does not reach
or exceed the barrier B at any time up to
and including time T, and 0 otherwise.
For an up-and-out barrier call option with
barrier B = 140, strike price K = 90 and
exercise timeT = 3 in the binomial model
with parameters U = 0.2, D = -0.1, R = 0.1
and S(0) = 100 compute the following.
(a) The option price at time 0;
%3D
%3D
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