Please solving problem2Problem1We consider a two-period binomial model with the following properties: each period lastsone (1) year and the current stock price is S0 = 4. On each period, the stock price doubleswhen it moves up and is reduced by half when it moves down. The annual interest rateon the money market is 25%. (This model is the same as in Prob. 1 of HW#2).We consider four options on this market: A European call option with maturity T = 2 years and strike price K = 5; A European put option with maturity T = 2 years and strike price K = 5; An American call option with maturity T = 2 years and strike price K = 5; An American put option with maturity T = 2 years and strike price K = 5.(a) Find the price at time 0 of both European options.(b) Find the price at time 0 of both American options. Compare your results with (a)and comment.(c) For each of the American options, describe the optimal exercising strategy. Problem 2. (Prob. 1 continued)We consider the same stock evolution as in Problem 1, but we now assume that the marketis 3-period and the expiration date of the options is T = 3 years.(a) Repeat questions (a), (b) and (c) of Problem 1 in this new market. (You don't haveto provide all the calculations, numerical results are sufficient.)(b) We consider a new type of option on this market: an American straddle option withstrike price K = 5. The payoff of an American straddle is the sum of the payoffs ofan American call and an American put. If you exercise it when St = 6, your payoffis 1. If you exercise it when S₁ = 2, your payoff is 3. You are allowed to exercise atany time. Find the price of this option.(c) Describe the optimal exercising strategy.1(d) Let Co (resp. Po, Ko) be the prices of the American call (resp. put, straddle). Givean intuitive explanation why you found thatKo < Co + Po.

Answered: Image /qna-images/answer/a35ab2ee-d5a7-42fd-b660-f84195929028.jpg

Answered: Problem 2. (Prob. 1 continued) We…

MATLAB: An Introduction with Applications

6th Edition

ISBN:9781119256830

Author:Amos Gilat

Publisher:Amos Gilat

Chapter1: Starting With Matlab

Section: Chapter Questions

Problem 1P

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Please solving problem2

Problem1

We consider a two-period binomial model with the following properties: each period lasts
one (1) year and the current stock price is S0 = 4. On each period, the stock price doubles
when it moves up and is reduced by half when it moves down. The annual interest rate
on the money market is 25%. (This model is the same as in Prob. 1 of HW#2).
We consider four options on this market:
A European call option with maturity T = 2 years and strike price K = 5;
A European put option with maturity T = 2 years and strike price K = 5;
An American call option with maturity T = 2 years and strike price K = 5;
An American put option with maturity T = 2 years and strike price K = 5.
(a) Find the price at time 0 of both European options.
(b) Find the price at time 0 of both American options. Compare your results with (a)
and comment.
(c) For each of the American options, describe the optimal exercising strategy.