hw1.pdf - CS 335 Fall 2017 Assignment 1 Instructor Justin W.L Wan Office DC3625 Classroom MC 4020 MWF 1:30-2:20pm Class homepage

# hw1.pdf - CS 335 Fall 2017 Assignment 1 Instructor Justin...

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CS 335 - Fall 2017: Assignment 1 Instructor: Justin W.L. Wan Office: DC3625 Email: [email protected] Classroom: MC 4020 MWF 1:30-2:20pm Office hours: Tuesdays 1-2:30pm Class homepage: e cs335/ Due: October 2, Monday, 2017 (in class) IMPORTANT: In this and in future assignments, most of the marks for programming questions are allocated for explanations of algorithms (i.e. pseudo-code) and explanation of results. If all you hand in is the listing of the “Raw Code” or “Raw Output” by itself, you will get poor marks. All coding should be done in MATLAB. By default, you should submit listings of all MATLAB code used in your assignment. Be sure to document (i.e. add liberal comments) your code. The TA will take off marks for poor documentation. You are advised to make a copy of your assignment before you hand it in. We try to make sure it does not happen, but assignments occasionally go missing. 1. (5 marks) No-arbitrage option pricing.Suppose the current stock price is \$20. A two state tree is defined such that after 3 months, thestock price may increase to \$22 with probability 0.1 and decrease to \$18 with probability 0.9.Consider a European call option with strike,K=\$21 and expiryT=3 months. The no-arbitragevalue of the call option for today is given as \$0.633.Suppose the option valueV*>0.633. Devise a strategy such that it will result in a positive

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