Suppose that the stock follows the binomial model

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

View Full Document Right Arrow Icon
This is the end of the preview. Sign up to access the rest of the document.

Unformatted text preview: value of the call option VC by the formula: VP VC = e rT K S0 In the example for March 12 Google options, exp( rt) = 0.9966 so we might as well ignore that factor. As the next table shows the formula works well in practice strike 600 640 680 6.8 VP 28.00 45.90 74.16 VC 55.60 32.70 17.85 S0 + V P V C 598.20 638.20 681.31 Exercises 6.1. A stock is now at $110. In a year its price will either be $121 or $99. (a) Assuming that the interest rate is r = 0.04 find the price of a call (S1 113)+. (b) How much stock 0 do we need to buy to replicate the option. (c) Verify that having V0 in cash and 0 in stock replicates the option exactly. 6.2. A stock is now at $60. In a year its price will either be $75 or $45. (a) Assuming that the interest rate is r = 0.05 find the price of a put (60 S1 )+. (b) How much stock 0 do we need to sell to replicate the option. (c) Verify that having V0 in cash and 0 in stock replicates the option exactly. 6.3. It was crucial for our no arbitrage computations that there were only two possible val...
View Full Document

This document was uploaded on 03/06/2014 for the course MATH 4740 at Cornell University (Engineering School).

Ask a homework question - tutors are online