Unformatted text preview: mium (see Economics of Financial Markets , chapter 19 (section 19.2): c = πc u + (1-π ) c d R where c u and c d are deﬁned by: c u = max [0 , uS-X ] in State 1 and c d = max [0 , dS-X ] in State 2 and π ≡ R-d u-d and 1-π ≡ 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 = πp u + (1-π ) 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
- Economics, Strike price, Economics of Financial Markets