Assign2Rev - u = 1 1 d = 0 9 S = 100 r = 0 08 and...

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STAT/ACTSC 446/846 Assignment #2 - Additional Information (as of Oct. 5) Some additional information/minor changes for the following exercises on the binomial model: Ex 10.6 and 10.7 Since we are asking you to use n = 4 instead of n = 2, you should also change T = 1 to T = 2, so that the size h of the time-steps remain the same (and hence u and d also stay the same). Ex 10.12 (take δ = 3% instead of δ = 0, n = 3 instead of n = 2, and T = 1 year instead of 0.5 year).Take u = e σ T/n = e 0 . 3 1 / 3 = 1 . 19 and d = e - σ T/n = e - 0 . 3 1 / 3 = 0 . 84. a) Compute the call price (of a European Call). b) Compute the put price (of a European put). Don’t do the American put. Ex 11.9 (Use an Excel spreadsheet for this problem). Use a binomial tree with
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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.

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