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Assign3 - STAT/ACTSC 446/846 Assignment#3(due(1(This is...

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Unformatted text preview: STAT/ACTSC 446/846 Assignment #3 (due November 11, 2009) (1) (This is Problem 6.9 from the “Financial Economics” book but with three time intervals) Deter- mine the value of an European put option on the geometric average of the price of a stock with current price \$20, strike price \$20, continuously compounded risk-free rate 7.5% per year, volatility 25% per year, and time to maturity 3 months. The geometric average uses the current value plus the value at the end of each month to the date of calculation of the average (sampling frequency is monthly). No dividends are due on the stock over the next 3 months. Use a monthly time interval and a binomial model. (2) Using a three-period binomial model, calculate the value a 3-month American call option on a dividend-paying stock with current price \$10 and exercise price of \$10. The dividend is due at the end of the first month and is equal to \$0.50. The volatility of the stock is 15%, and the continuously compounded risk-free interest rate is 4% per year for bonds with maturity less than...
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