Lecture 8 Supplementary Part 2

# 1 canyouexpressthelaststatementmathemacally 2 can you

This preview shows page 1. Sign up to view the full content.

This is the end of the preview. Sign up to access the rest of the document.

Unformatted text preview: Compound Op'ons Textbook pp 453‐457: Example: Remember that bonus ques'on on Exam 2 about American Op'ons? Hold that thought and try this. •  Suppose at 'me t1, the stock will pay a dividend, D. For an American Call Op'on, we can optto exercise the op'on at the cum‐dividend price, St1 + D, or hold the op'on which will then have a value reﬂec'ng the ex‐ dividend price, St1. •  Therefore, at t1, the price of the op'on is the greater of its exercise value, St1, + D – K, and the op'on valued at the ex‐dividend price C(St1, T ‐ t1). 1.  Can you express the last statement mathema'cally? 2.  Can you ﬁnd a replica'ng porbolio for the American Call Op'on that includes a compound op'on? (Hint: Take a look at part 1. Now recall our friend the Put...
View Full Document

## This note was uploaded on 10/31/2013 for the course SEEM 5840 taught by Professor Doctorw during the Fall '12 term at CUHK.

Ask a homework question - tutors are online