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