Your broker now calls you with an interesting oer you

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Unformatted text preview: 1; step =0; step) { for (int i=0; i =step; ++i) { call values[i] = (p up*call values[i+1]+p down*call values[i])*Rinv; prices[i] = d*prices[i+1]; call values[i] = max(call values[i],prices[i] X); // check for exercise }; 30 }; return call values[0]; }; 15.5 Implementing the binomial option formula. 143 It is in the case of American options, allowing for the possibility of early exercise, that binomial approximations are useful. At each node we calculate the value of the option as a function of the next periods prices, and then check for the value of exercising the option now. References Cox, Ross, and Rubinstein (1979) is the general reference on the binomial option pricing model. Good textbook discussions of multiperiod binomial models are Hull (2008) and McDonald (2006). See Ødegaard (2007) for some further discussion of implementation of option pricing formulas. 144 Multiple Periods in the Binomial Option Pricing Model Problems 15.1 ud [2] The current price of the underlying is 100. This price will two periods from now move to either 121, 99 or 81. Find the constants and by which prices move each period. 15.2...
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This document was uploaded on 02/15/2014 for the course BEM 103 at Caltech.

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