Homework 8.docx - Homework 8 – Problem 1 You are trying to estimate the expected payoff of a financial instrument called a cash-or-nothing call option

# Homework 8.docx - Homework 8 – Problem 1 You are trying...

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Homework 8 – April 11, 2019 Problem 1. You are trying to estimate the expected payoff of a financial instrument, called a cash-or-nothing call option. Assume that the annual logarithmic returns of the stock are normally distributed. Assume that today’s price of the stock is 100, the mean of the logarithmic returns is 5% per year, the standard deviation of logarithmic returns 25% measured annually, and the time to the expiration of the option 1 year. The claim pays \$1 if the price of the stock in one year is above \$100 and 0 otherwise. The actual price of this claim is 0.5040. a. Use simulation with 1000 iterations to compute the price of the claim. Each iteration should use a single, annual, time step. What is the estimated price of the claim? How close is it to \$0.5040? b. What is the standard deviation of your Monte Carlo estimate? What is the 95% confidence interval for your estimate? Problem 2. The Tinkan Company produces 1-pound cans for the Canadian salmon industry. Each year the salmon spawn during a 24-hour period and must be canned immediately. Tinkan has the following agreement
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