Unformatted text preview: the riskfree interest rate is zero. What is the price of the call option at time 0? Solution: We know that the option price is give by C (0) = 1 R μ C u R − d u − d + C d u − R u − d ¶ . In our case, C u = (10 − 9) + = 1 , C d = (6 − 9) + = 0 , R = 1 , u = 10 8 , d = 6 8 . Thus C (0) = 1 1 μ 1 1 − 6 8 10 8 − 6 8 + 0 10 8 − 1 10 8 − 6 8 ¶ = 0 . 5 . 9. Is it true that N ( t ) ≥ n + 1 if and only if S n < t ? Solution: No. As a counterexample, suppose S n = t and S n +1 = t . Then N ( t ) ≥ n + 1 , but S n = t. 1...
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 Spring '09
 Strike price, InClass Homework Problems, E3106. Prof. Kou

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