DEVELOP.MATH(3 VOLS) CUSTOM-W/MML <IC<
16th Edition
ISBN: 9781323235911
Author: BITTINGER
Publisher: Pearson Custom Publishing
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Chapter B, Problem 8ES
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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…
No chatgpt pls will upvote Already
Chapter B Solutions
DEVELOP.MATH(3 VOLS) CUSTOM-W/MML <IC<
Ch. B - Complete.
1.
Ch. B - Prob. 2DECh. B - Prob. 3DECh. B - Prob. 4DECh. B - Prob. 5DECh. B - Prob. 6DECh. B - Prob. 7DECh. B - Prob. 8DECh. B - Prob. 9DECh. B - Prob. 10DE
Ch. B - Prob. 11DECh. B - Prob. 12DECh. B - Prob. 13DECh. B - Prob. 14DECh. B - Prob. 1ESCh. B - Prob. 2ESCh. B - Prob. 3ESCh. B - Prob. 4ESCh. B - Prob. 5ESCh. B - Prob. 6ESCh. B - Prob. 7ESCh. B - Prob. 8ESCh. B - Prob. 9ESCh. B - Prob. 10ESCh. B - Prob. 11ESCh. B - Prob. 12ESCh. B - Prob. 13ESCh. B - Prob. 14ESCh. B - Prob. 15ESCh. B - Prob. 16ESCh. B - Prob. 17ESCh. B - Prob. 18ESCh. B - Prob. 19ESCh. B - Prob. 20ESCh. B - Prob. 21ESCh. B - Prob. 22ESCh. B - Prob. 23ESCh. B - Prob. 24ESCh. B - Prob. 25ESCh. B - Prob. 26ESCh. B - Prob. 27ESCh. B - Prob. 28ESCh. B - Prob. 29ESCh. B - Prob. 30ESCh. B - Prob. 31ESCh. B - Prob. 32ESCh. B - Prob. 33ESCh. B - Prob. 34ESCh. B - Prob. 35ESCh. B - Prob. 36ESCh. B - Prob. 37ESCh. B - Prob. 38ESCh. B - Prob. 39ESCh. B - Prob. 40ESCh. B - Prob. 41ESCh. B - Prob. 42ESCh. B - Prob. 43ESCh. B - Prob. 44ESCh. B - Prob. 45ESCh. B - Prob. 46ESCh. B - Prob. 47ESCh. B - Prob. 48ESCh. B - Prob. 49ESCh. B - Prob. 50ESCh. B - Prob. 51ESCh. B - Prob. 52ESCh. B - Prob. 53ESCh. B - Prob. 54ESCh. B - Prob. 55ESCh. B - Prob. 56ESCh. B - Prob. 57ESCh. B - Prob. 58ESCh. B - Prob. 59ESCh. B - Medical Dosage. Solve each of the following. (None...Ch. B - 61. Tanzanite. Tanzanite is a gemstone discovered...
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