Unformatted text preview: u = 1 . 1 , d = 0 . 9, S = 100, r = 0 . 08, and time-steps of size 3 months. a) Compute the price of a European call, and the replicating portfolio ( θ S shares of stock, θ B invested in a bank account) for a strike K = 100 and for the four diﬀerent maturities: 3 months (1 time-step), 6 months (2 time-steps), 1 year (4 time-steps) and 2 years (8 times-steps). For the 1-year and 2-year maturities, you only need to report the composition of the replicating portfolio for the two ﬁrst nodes. b) Comment the eﬀect of the maturity on the option price (you do not have to compute the expected return on the option)....
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This note was uploaded on 03/02/2011 for the course ACTSC 446 taught by Professor Adam during the Fall '09 term at Waterloo.
- Fall '09