This section asks you to calculate prices for various options. In all cases, consider a rate r = 7.97% per year. Estimate the volatility of returns using the estimator: 1 n-1 σ²≈ T-t i=0 Si+1 log. Sti 2 The term of each option will be T = 182/360 (half a year). Determine a reasonable strike K, which is at similar levels to the price series you have downloaded. An option is a derivative instrument that gives its holder the right to buy or sell an underlying asset at a pre-agreed price K at a future date T. If this right can only be exercised in time T, we say that the option is of the European type. If it can be exercised at T or at any time prior to T, then we say that the option is American. Likewise, if the option grants the right to buy, we say that the option is Call type, if it grants the right to sell then the option is Puttype. These types of options are the simplest and are known as European vanilla options. In this case, if T is the expiration date of the contract, and St is the price of the underlying at time t, then the value of the option on its expiration date T will be: С = max{S — K, 0} = (SÃ − K)+. - - The value of an option on its expiration date is known as the payment function. Exercise: Based on the previous information, find the payment function of a European Put option.
This section asks you to calculate prices for various options. In all cases, consider a rate r = 7.97% per year. Estimate the volatility of returns using the estimator: 1 n-1 σ²≈ T-t i=0 Si+1 log. Sti 2 The term of each option will be T = 182/360 (half a year). Determine a reasonable strike K, which is at similar levels to the price series you have downloaded. An option is a derivative instrument that gives its holder the right to buy or sell an underlying asset at a pre-agreed price K at a future date T. If this right can only be exercised in time T, we say that the option is of the European type. If it can be exercised at T or at any time prior to T, then we say that the option is American. Likewise, if the option grants the right to buy, we say that the option is Call type, if it grants the right to sell then the option is Puttype. These types of options are the simplest and are known as European vanilla options. In this case, if T is the expiration date of the contract, and St is the price of the underlying at time t, then the value of the option on its expiration date T will be: С = max{S — K, 0} = (SÃ − K)+. - - The value of an option on its expiration date is known as the payment function. Exercise: Based on the previous information, find the payment function of a European Put option.
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:This section asks you to calculate prices for various options. In all cases, consider
a rate r = 7.97% per year. Estimate the volatility of returns using the estimator:
1
n-1
σ²≈
T-t
i=0
Si+1
log.
Sti
2
The term of each option will be T = 182/360 (half a year). Determine a
reasonable strike K, which is at similar levels to the price series you have
downloaded.
An option is a derivative instrument that gives its holder the right to buy or sell
an underlying asset at a pre-agreed price K at a future date T.
If this right can only be exercised in time T, we say that the option is of the
European type.
If it can be exercised at T or at any time prior to T, then we say that the option is
American. Likewise, if the option grants the right to buy, we say that the option
is Call type, if it grants the right to sell then the option is Puttype. These types of
options are the simplest and are known as European vanilla options.
In this case, if T is the expiration date of the contract, and St is the price of the
underlying at time t, then the value of the option on its expiration date T will be:
С = max{S — K, 0} = (SÃ − K)+.
-
-
The value of an option on its expiration date is known as the payment function.
Exercise: Based on the previous information, find the payment function of a
European Put option.
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