Stochastic

# To illustrate its use we consider example a5 suppose

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Unformatted text preview: we see that VS VP + VC . Explain why this should be true. 6.18. Consider the three-period binomial model with S0 = 16, u = 3, d = 1/2 and r = 1/3 An American limited liability call option pays min{(Sn 10)+ , 60} if exercised at time 0 n 3. In words it is a call option but your proﬁt is limited to \$60. Find the value and the optimal exercise strategy. 6.19. In the American version of the callback option, you can buy the stock at time n at its current price and then sell it at the highest price seen in the past for a proﬁt of Vn = max0mn Sm Sn . Compute the value of the three period version of this option when the stock follows the binomial model with S0 = 8, u = 2, d = 1/2, and r = 1/4. 6.20. The payo↵ of the Asian option is based on the average price: An = (S0 + · · · + Sn )/(n + 1). Suppose that the stock follows the binomial model with S0 = 4, u = 2, d = 1/2, and r = 1/4. Find the value of the American version of the three period Asian option, (Sn 4)+ , i.e., when you can exercise the option at any time. 6.21. Show...
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## This document was uploaded on 03/06/2014 for the course MATH 4740 at Cornell.

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