Unformatted text preview: mium (see Economics of Financial Markets , chapter 19 (section 19.2): c = πc u + (1π ) c d R where c u and c d are deﬁned by: c u = max [0 , uSX ] in State 1 and c d = max [0 , dSX ] in State 2 and π ≡ Rd ud and 1π ≡ uR ud . 3. Derive, using an arbitrage argument, the price of a European put option in the simple twostate model (see Economics of Financial Markets , chapter 19 (section 19.2): p = πp u + (1π ) p d R where: p u = max [0 , XuS ] in State 1 and p d = max [0 , XdS ] in State 2. 4. Discuss the problems in applying the BlackScholes model to predict traded options prices (for example, on LIFFE) in (a) the shares of companies, and (b) stock price indexes. *****...
View
Full Document
 Spring '12
 R.E.Bailey
 Economics, Strike price, Economics of Financial Markets

Click to edit the document details