Consider the discrete-time binomial tree model with three periods of length 1, i.e. T = 3 and t = 0, 1, 2, 3. In each period the price can move up or down, St+1 is either uSt or dSt. Assume that the factor for moving up is u = 4/3, the factor for moving down is d = 3/4, and that the interest rate is r = 0.0. The initial stock price is So = 1. (a) Compute the price process (i.e. prices at all times and states) for a European Put option on the stock with strike price K = 1 and maturity T = 3. ΤΗ Σίμο St + (K – with ST (b) Compute the price at time t = 0 of the Australian option K- K = 1. Note: As this option is path dependent, you will not be able to use the recursive method, nor will you be able to use the CRR formula.
Consider the discrete-time binomial tree model with three periods of length 1, i.e. T = 3 and t = 0, 1, 2, 3. In each period the price can move up or down, St+1 is either uSt or dSt. Assume that the factor for moving up is u = 4/3, the factor for moving down is d = 3/4, and that the interest rate is r = 0.0. The initial stock price is So = 1. (a) Compute the price process (i.e. prices at all times and states) for a European Put option on the stock with strike price K = 1 and maturity T = 3. ΤΗ Σίμο St + (K – with ST (b) Compute the price at time t = 0 of the Australian option K- K = 1. Note: As this option is path dependent, you will not be able to use the recursive method, nor will you be able to use the CRR formula.
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:Consider the discrete-time binomial tree model with three periods of length 1, i.e. T = 3
and t = 0, 1, 2, 3. In each period the price can move up or down, St+1 is either uSt or dSt.
Assume that the factor for moving up is u = 4/3, the factor for moving down is d = 3/4,
and that the interest rate is r = 0.0. The initial stock price is So = 1.
(a) Compute the price process (i.e. prices at all times and states) for a European Put
option on the stock with strike price K = 1 and maturity T = 3.
(x - ž)
(b) Compute the price at time t = 0 of the Australian option
K
with
ST
K = 1. Note: As this option is path dependent, you will not be able to use the
recursive method, nor will you be able to use the CRR formula.
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