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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