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Unformatted text preview: mium (see Economics of Financial Markets , chapter 19 (section 19.2): c = c u + (1- ) c d R where c u and c d are dened by: c u = max [0 , uS-X ] in State 1 and c d = max [0 , dS-X ] in State 2 and R-d u-d and 1- u-R u-d . 3. Derive, using an arbitrage argument, the price of a European put option in the simple two-state model (see Economics of Financial Markets , chapter 19 (section 19.2): p = p u + (1- ) p d R where: p u = max [0 , X-uS ] in State 1 and p d = max [0 , X-dS ] in State 2. 4. Discuss the problems in applying the Black-Scholes model to predict traded options prices (for example, on LIFFE) in (a) the shares of companies, and (b) stock price indexes. *****...
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- Spring '12