Consider a Russian option with value function V(S, J) in the case where there are continuous dividends paid on the underlying asset S at rate D. Define the variable J for this option. A similarity reduction of the form W(n) = V/J with n S/J leads to 110²² W +(r− D)nW' rW = 0, which must be solved subject to - W(1) W'(1) = 0, W(no) = 1, W'(no) = 0, where n = ŋo is the optimal exercise boundary in similarity coordinates. The current value of the underlying is S = 3. What is the current value of the Russian option assuming that σ = 0.3, r = 0.1 and D = 0.05? Present your results to a minimum of 4 decimal places.
Consider a Russian option with value function V(S, J) in the case where there are continuous dividends paid on the underlying asset S at rate D. Define the variable J for this option. A similarity reduction of the form W(n) = V/J with n S/J leads to 110²² W +(r− D)nW' rW = 0, which must be solved subject to - W(1) W'(1) = 0, W(no) = 1, W'(no) = 0, where n = ŋo is the optimal exercise boundary in similarity coordinates. The current value of the underlying is S = 3. What is the current value of the Russian option assuming that σ = 0.3, r = 0.1 and D = 0.05? Present your results to a minimum of 4 decimal places.
Financial Management: Theory & Practice
16th Edition
ISBN:9781337909730
Author:Brigham
Publisher:Brigham
Chapter25: Portfolio Theory And Asset Pricing Models
Section: Chapter Questions
Problem 4P
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Transcribed Image Text:Consider a Russian option with value function V(S, J) in the case where there
are continuous dividends paid on the underlying asset S at rate D. Define the
variable J for this option. A similarity reduction of the form W(n) = V/J with
n S/J leads to
110²² W +(r− D)nW' rW = 0,
which must be solved subject to
-
W(1) W'(1) = 0, W(no) = 1, W'(no) = 0,
where n = ŋo is the optimal exercise boundary in similarity coordinates. The
current value of the underlying is S = 3. What is the current value of the
Russian option assuming that σ = 0.3, r = 0.1 and D = 0.05? Present your
results to a minimum of 4 decimal places.
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