Numerical Analysis
10th Edition
ISBN: 9781305253667
Author: Richard L. Burden, J. Douglas Faires, Annette M. Burden
Publisher: Cengage Learning
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Chapter 2.4, Problem 6ES
(a)
To determine
To show: That the
(b)
To determine
To show: That the
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We consider an N-period CRR model where each period is 1 year (At = 1), the up factor is
u = 0.1, the down factor is d = e−0.3 and r = 0. We remind you that in the CRR model, the
stock price at time tn is modeled (under P) by
Sta
=
So exp (μtn + σ√AtZn),
where (Zn) is a simple symmetric random walk.
(a) Find the parameters μ and σ for the CRR model described above.
(b) Find P
Ste
So
55/50
€ > 1).
StN
(c) Find lim P
804-N
(d) Determine q. (You can use e- 1 x.)
Ste
(e) Find Q
So
(f) Find lim Q
004-N
StN
So
In this problem, we consider a 3-period stock market model with evolution given in Fig. 1 below.
Each period corresponds to one year. The interest rate is r = 0%.
16
22
28
12
16
12
8
4
2
time
Figure 1: Stock evolution for Problem 1.
(a) A colleague notices that in the model above, a movement up-down leads to the same value
as a movement down-up. He concludes that the model is a CRR model. Is your colleague
correct? (Explain your answer.)
(b) We consider a European put with strike price K = 10 and expiration T = 3 years. Find
the price of this option at time 0. Provide the replicating portfolio for the first period.
(c) In addition to the call above, we also consider a European call with strike price K = 10
and expiration T = 3 years. Which one has the highest price? (It is not necessary to
provide the price of the call.)
(d) We now assume a yearly interest rate r = 25%. We consider a Bermudan put option with
strike price K = 10. It works like a standard put, but you can exercise it…
In this problem, we consider a 2-period stock market model with evolution given in Fig. 1 below.
Each period corresponds to one year (At = 1). The yearly interest rate is r = 1/3 = 33%. This
model is a CRR model.
25
15
9
10
6
4
time
Figure 1: Stock evolution for Problem 1.
(a) Find the values of up and down factors u and d, and the risk-neutral probability q.
(b) We consider a European put with strike price K
the price of this option at time 0.
==
16 and expiration T = 2 years. Find
(c) Provide the number of shares of stock that the replicating portfolio contains at each pos-
sible position.
(d) You find this option available on the market for $2. What do you do? (Short answer.)
(e) We consider an American put with strike price K
= 16 and expiration T
=
2 years. Find
the price of this option at time 0 and describe the optimal exercising strategy.
(f) We consider an American call with strike price K ○ = 16 and expiration T = 2 years. Find
the price of this option at time 0 and describe…
Chapter 2 Solutions
Numerical Analysis
Ch. 2.1 - Use the Bisection method to find p3 for f(x)=xcosx...Ch. 2.1 - Let f(x) = 3(x +1)(x 12)(x 1) = 0. Use the...Ch. 2.1 - Use the Bisection method to find solutions...Ch. 2.1 - Use the Bisection method to find solutions...Ch. 2.1 - Use the Bisection method to find solutions...Ch. 2.1 - Prob. 7ESCh. 2.1 - Prob. 8ESCh. 2.1 - Prob. 9ESCh. 2.1 - Prob. 10ESCh. 2.1 - Prob. 11ES
Ch. 2.1 - Let f(x) = (x + 2)(x + 1)x(x 1)3(x 2). To which...Ch. 2.1 - Find an approximation to 253 correct to within 104...Ch. 2.1 - Find an approximation to 3 correct to within 104...Ch. 2.1 - A trough of length L has a cross section in the...Ch. 2.1 - Use Theorem 2.1 to find a bound for the number of...Ch. 2.1 - Prob. 18ESCh. 2.1 - Prob. 19ESCh. 2.1 - Let f(x) = (x 1)10, p = 1, and pn = 1 + 1/n. Show...Ch. 2.1 - The function defined by f(x) = sin x has zeros at...Ch. 2.1 - Prob. 1DQCh. 2.1 - Prob. 2DQCh. 2.1 - Is the Bisection method sensitive to the starting...Ch. 2.2 - Use algebraic manipulation to show that each of...Ch. 2.2 - a. Perform four iterations, if possible, on each...Ch. 2.2 - Let f(x) = x3 2x + 1. To solve f(x) = 0, the...Ch. 2.2 - Let f(x) = x4 + 3x2 2. To solve f(x) = 0, the...Ch. 2.2 - The following four methods are proposed to compute...Ch. 2.2 - Prob. 6ESCh. 2.2 - Prob. 7ESCh. 2.2 - Prob. 8ESCh. 2.2 - Use Theorem 2.3 to show that g(x) = + 0.5...Ch. 2.2 - Use Theorem 2.3 to show that g(x) = 2x has a...Ch. 2.2 - Use a fixed-point iteration method to find an...Ch. 2.2 - Use a fixed-point iteration method to determine a...Ch. 2.2 - Use a fixed-point iteration method to determine a...Ch. 2.2 - Prob. 20ESCh. 2.2 - Prob. 21ESCh. 2.2 - a. Show that Theorem 2.3 is true if the inequality...Ch. 2.2 - a. Use Theorem 2.4 to show that the sequence...Ch. 2.2 - Prob. 24ESCh. 2.2 - Prob. 25ESCh. 2.2 - Suppose that g is continuously differentiable on...Ch. 2.3 - Let f(x) = x2 6 and p0 = 1. Use Newtons method to...Ch. 2.3 - Let f(x) = x3 cos x and p0 = 1. Use Newtons...Ch. 2.3 - Let f(x) = x2 6. With p0 = 3 and p1 = 2, find p3....Ch. 2.3 - Let f(x) = x3 cos x. With p0 = 1 and p1 = 0, find...Ch. 2.3 - Prob. 11ESCh. 2.3 - Prob. 12ESCh. 2.3 - The fourth-degree polynomial...Ch. 2.3 - Prob. 14ESCh. 2.3 - Prob. 15ESCh. 2.3 - Prob. 16ESCh. 2.3 - Prob. 22ESCh. 2.3 - Prob. 23ESCh. 2.3 - Prob. 24ESCh. 2.3 - Prob. 25ESCh. 2.3 - Prob. 27ESCh. 2.3 - A drug administered to a patient produces a...Ch. 2.3 - Prob. 30ESCh. 2.3 - Prob. 32ESCh. 2.3 - Prob. 1DQCh. 2.3 - Prob. 2DQCh. 2.3 - Prob. 3DQCh. 2.3 - Prob. 4DQCh. 2.4 - Prob. 6ESCh. 2.4 - a. Show that for any positive integer k, the...Ch. 2.4 - Prob. 8ESCh. 2.4 - a. Construct a sequence that converges to 0 of...Ch. 2.4 - Prob. 10ESCh. 2.4 - Prob. 11ESCh. 2.4 - Prob. 12ESCh. 2.4 - Prob. 13ESCh. 2.4 - Prob. 14ESCh. 2.4 - Prob. 1DQCh. 2.4 - Prob. 2DQCh. 2.4 - Prob. 4DQCh. 2.5 - Let g(x) = cos(x 1) and p0(0) = 2. Use...Ch. 2.5 - Prob. 4ESCh. 2.5 - Prob. 5ESCh. 2.5 - Prob. 6ESCh. 2.5 - Use Steffensens method to find, to an accuracy of...Ch. 2.5 - Prob. 8ESCh. 2.5 - Prob. 9ESCh. 2.5 - Use Steffensens method with p0 = 3 to compute an...Ch. 2.5 - Use Steffensens method to approximate the...Ch. 2.5 - Prob. 12ESCh. 2.5 - Prob. 13ESCh. 2.5 - Prob. 14ES
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