Consider a chooser option that you may choose whether the option is a put (with expiration T = 2) or a call (with expiration T = 2) at a specified time to = 1. Moreover, we have S = 10, σ = 0.2, r = 0.05, K = 9. Question: What is the price for this chooser option? (

Consider a chooser option that you may choose whether the option is a put (with expiration T = 2) or a call (with expiration T = 2) at a specified time to = 1. Moreover, we have S = 10, σ = 0.2, r = 0.05, K = 9. Question: What is the price for this chooser option? (

Essentials of Business Analytics (MindTap Course List)

2nd Edition

ISBN:9781305627734

Author:Jeffrey D. Camm, James J. Cochran, Michael J. Fry, Jeffrey W. Ohlmann, David R. Anderson

Publisher:Jeffrey D. Camm, James J. Cochran, Michael J. Fry, Jeffrey W. Ohlmann, David R. Anderson

Chapter15: Decision Analysis

Section: Chapter Questions

Problem 6P

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Question

Consider a chooser option that you may choose whether the option is a put (with expiration
T = 2) or a call (with expiration T = 2) at a specified time to = 1. Moreover, we have
So
10, o = 0.2, r =
Question: What is the price for this chooser option?
0.05, K = 9.

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Question 1. Suppose t ≤ T1 ≤ T2 ≤ T3, where t is the current time, and ∆ > 0. Recall that Z(T1, T2) is the price at time T1 of a ZCB with maturity T2 and F(T1, T2, T3) is the forward price at time T1 for a forward contract with maturity T2 on a ZCB with maturity T3. a) For each of the pairs of A and B in the table, choose the most appropriate relationship out of ≥, ≤, = , ?, where ? means the relationship is indeterminate. Give brief reasoning. A ≥, ≤, = , ? B (i) Z(t, T1) 1 (ii) Z(T1, T1) 1 (iii) Z(t, T2) Z(t, T3) (iv) Z(T1, T2) Z(T1, T3) (v) Z(T1, T3) Z(T2, T3) (vi) Z(T1, T1 + ∆) Z(T2, T2 + ∆) (vii) F(t, T1, T2) F(t, T1, T3) (viii) F(t, T1, T3) F(t, T2, T3) (ix) limT→∞ Z(t, T) 0 Hint: Remember that at current time t, F(t, ·, ·) is known but Z(T, ·) is a random variable. b) What can you say about interest rates between T1 and T2 if i) Z(t, T1) = Z(t, T2)? ii) Z(t, T1) > 0 and Z(t, T2) = 0?