Lecture 33

# Lecture 33 - Agenda FinancialEconomics Lecture33...

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11/20/2010 1 Financial Economics Lecture 33 Economics 3330 Cornell University November 19, 2010 Agenda LC: Pre expiration values, Binomial Options TC: Binomial puts, Black Scholes Finish Chapter 21 NC: Performance Evaluation Chapter 24 Following classes will also cover Chapter 26 Final lecture will be a review PS 10 is now posted Binomial Put Option Example 100 120 P 0 What should be price of put when r f = 10% 90 Stock Price 20 Put Option Value X = 110 Replicating Portfolio \$120 bond minus 1.5 puts replicates stock: 120–1.5*0 when good, 120 1.5*20 when bad Follows that S 0 = 120/(1+r f )–1.5P 1.5P = 109.09 100 = 9.09/1.5 => P = 6.06 Number of puts per share is 1.5 Number of shares per put is: H = [(P u –P d )/(uS 0 –dS 0 ) = (0 – 20) / 30 = 2/3 Could also have solved P = C + X/(1+r f ) T S 0 Binomial Calls Generally Initial Stock price changes by multiple u or d Call has two values: C u and C d C u = uS 0 –X C d = max[0, dS 0 – X] FV of bonds is dS 0 Number of calls per share: (u d)S 0 / (C u C

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## This note was uploaded on 04/06/2011 for the course CHEM 2070 taught by Professor Chirik,p during the Fall '05 term at Cornell.

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Lecture 33 - Agenda FinancialEconomics Lecture33...

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