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Unformatted text preview: S0 = 64, u = 2, d = 1/2, and r = 1/4.
(a) Find the value Vn (a) of the call option (S3 125)+ and the hedging strategy
n (a). (b) Check your answer to (a) by computing V0 = E (V3 /(1 + r ) ). (c)
Find the value at time 0 of the put option.
6.15. Consider the binomial model with S0 = 27, u = 4/3, d = 2/3, and
r = 1/9. (a) Find the risk neutral probability p⇤ . (b) Find value Vn (a) of the
put option (30 S3 )+ and the hedging strategy n (a). (c) Check your answer
to (b) by computing V0 = E ⇤ (V3 /(1 + r)3 ).
6.16. Consider the binomial model of Problem 6.15 S0 = 27, u = 4/3, d = 2/3,
and r = 1/9 but now (a) ﬁnd value and the optimal exercise strategy for the
American put option (30 S3 )+ , and (b) ﬁnd the value of the American call
option (S3 30)+ .
6.17. Continuing with the model of previous problem S0 = 27, u = 4/3, d =
2/3, and r = 1/9, we are now interested in ﬁnding value VS of the American
straddle |S3 30|. Comparing with the values VP and VC of the call and the
put computed in the previous problem...
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- Spring '10
- The Land