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5. Consider a multi-period binomial model for a financial market with parameters So, r, d< u...
1. Consider the one period binomial model and assume 0 < So< 00, S1(H) -- uSo...
1. Consider the one period binomial model and assume 0 < So< 00, S1(H) -- uSo and Si (Τ)-dSo for some 0 〈 1 + r 〈 d 〈 u. P is an arbitrage oportunity. rove or disprove There
1. Consider the one period binomial model and assume 0 < So< 00, S1(H) -- uSo...
1. Consider the one period binomial model and assume 0 < So< 00, S1(H) -- uSo and Si (Τ)-dSo for some 0 〈 1 + r 〈 d 〈 u. P is an arbitrage oportunity. rove or disprove There
I. Consider the N-step binomial asset pricing model with 0 < d < 1 + r...
I. Consider the N-step binomial asset pricing model with 0 < d < 1 + r < u. Assume N = 3, So 100, r = 0.05, u = 1.10, and d 0.90. Calculate the price at time zero of each of the following options using backward induction (a) A European put option expiring at time N 2 with strike price K-100 (b) A European put option expiring at time N 3 with strike price K- 100 (c) A European...
5. Consider the single period binomial model as in Section 1.2.2. Suppose that d <1+r <u....
5. Consider the single period binomial model as in Section 1.2.2. Suppose that d <1+r <u. Show that if there exists an arbitrage opportunity (as in Definition 1.5), then one can find an arbitrage opportunity with V = 0. This means that there is no net cash flow at time 0. (Note: This is a step in the proof of Proposition 1.7 which you should go through carefully.) 1.2.2 Formal logical content The theory we build will be a mathematical...
1.1. Suppose that you have a stock in the one-period binomial model with fixed u, d,...
1.1. Suppose that you have a stock in the one-period binomial model with fixed u, d, and r such that 0< d< 1 +r < u. Suppose that there are positive numbers pi and such that pi, qi < 1, pi + q-1, and (1 + r)So = PiSi (H) + qi Si (T). Show that pi = p ad qi = q. Hint: You know that the risk-neutral probabilities satisfy these equations as well.
Problem 4, 5 p. ] (in prepation to the binomial model) Consider tossing a coin n...
Problem 4, 5 p. ] (in prepation to the binomial model) Consider tossing a coin n times where n 1 is fixed. Assume that the probability of occurring of "heads" is p(0< p1), and the probability of occurring of "tails" is q1-p and the outcomes of single tosses are independent of each other. Describe the sample space Ω of that experiment (all possible outcomes) and how the corresponding probability function P on Ω looks like. In other words, prescribe P...
2. Consider the N-step binomial asset pricing model with 0 < d<1< u (a) Assume N-3....
2. Consider the N-step binomial asset pricing model with 0 < d<1< u (a) Assume N-3. Sİ,-100, r-0.05, u-1.10, and d-0.90. Calculate the price at time (b) If the observed market price of the option in part (a) is $25 give a specific arbitrage trading (c) Suppose you wish to earn a profit of $100,000 from implementing your arbitrage trading zero, VO, of the European call-option with strike price K = 87.00. strategy to take advantage of any potential mis-pricing....
5. Consider the 3-period binomial model with So 100, u 2, dand r-1. (a) What is...
5. Consider the 3-period binomial model with So 100, u 2, dand r-1. (a) What is the current price of a lookback call option with a strike price of $100 that pays off (at time three) V3- max Sn - 100 Sn3 (b) What is the time-zero price of a lookback put option with a strike price of $100 that pays off (at time three) V 100-min Sn OSnK3 (c) What is the time-zero price of an Asian call option...
3. Consider the N-step binomial asset pricing model with 0 < d<1 A European bear-spread option...
3. Consider the N-step binomial asset pricing model with 0 < d<1 A European bear-spread option has payoff where Ki< K2 (a) Assume N- 3, So100, K-85, K2-100, 0.05,10, and d-0.90 Calculate the price at time zero, V, of the bear-spread option. (b) Specify how you can replicate the payoff of the European bear-spread option by investing in the stock and the bank account and verify that a short position in the European bear- spread option is hedged if the...
2. Consider a two-period binomial tree with u = 1.16, d = 0.96, So = 49,...
2. Consider a two-period binomial tree with u = 1.16, d = 0.96, So = 49, r = 0.07. Find the price of an American put with T = 2 and K = 50. (15 points)
1. Consider the one period binomial model and assume 0 < So< 00, S1(H) -- uSo and Si (Τ)-dSo for some 0 〈 1 + r 〈 d 〈 u. P is an arbitrage oportunity. rove or disprove There
1. Consider the one period binomial model and assume 0 < So< 00, S1(H) -- uSo and Si (Τ)-dSo for some 0 〈 1 + r 〈 d 〈 u. P is an arbitrage oportunity. rove or disprove There
I. Consider the N-step binomial asset pricing model with 0 < d < 1 + r < u. Assume N = 3, So 100, r = 0.05, u = 1.10, and d 0.90. Calculate the price at time zero of each of the following options using backward induction (a) A European put option expiring at time N 2 with strike price K-100 (b) A European put option expiring at time N 3 with strike price K- 100 (c) A European...
5. Consider the single period binomial model as in Section 1.2.2. Suppose that d <1+r <u. Show that if there exists an arbitrage opportunity (as in Definition 1.5), then one can find an arbitrage opportunity with V = 0. This means that there is no net cash flow at time 0. (Note: This is a step in the proof of Proposition 1.7 which you should go through carefully.) 1.2.2 Formal logical content The theory we build will be a mathematical...
1.1. Suppose that you have a stock in the one-period binomial model with fixed u, d, and r such that 0< d< 1 +r < u. Suppose that there are positive numbers pi and such that pi, qi < 1, pi + q-1, and (1 + r)So = PiSi (H) + qi Si (T). Show that pi = p ad qi = q. Hint: You know that the risk-neutral probabilities satisfy these equations as well.
Problem 4, 5 p. ] (in prepation to the binomial model) Consider tossing a coin n times where n 1 is fixed. Assume that the probability of occurring of "heads" is p(0< p1), and the probability of occurring of "tails" is q1-p and the outcomes of single tosses are independent of each other. Describe the sample space Ω of that experiment (all possible outcomes) and how the corresponding probability function P on Ω looks like. In other words, prescribe P...
2. Consider the N-step binomial asset pricing model with 0 < d<1< u (a) Assume N-3. Sİ,-100, r-0.05, u-1.10, and d-0.90. Calculate the price at time (b) If the observed market price of the option in part (a) is $25 give a specific arbitrage trading (c) Suppose you wish to earn a profit of $100,000 from implementing your arbitrage trading zero, VO, of the European call-option with strike price K = 87.00. strategy to take advantage of any potential mis-pricing....
5. Consider the 3-period binomial model with So 100, u 2, dand r-1. (a) What is the current price of a lookback call option with a strike price of $100 that pays off (at time three) V3- max Sn - 100 Sn3 (b) What is the time-zero price of a lookback put option with a strike price of $100 that pays off (at time three) V 100-min Sn OSnK3 (c) What is the time-zero price of an Asian call option...
3. Consider the N-step binomial asset pricing model with 0 < d<1 A European bear-spread option has payoff where Ki< K2 (a) Assume N- 3, So100, K-85, K2-100, 0.05,10, and d-0.90 Calculate the price at time zero, V, of the bear-spread option. (b) Specify how you can replicate the payoff of the European bear-spread option by investing in the stock and the bank account and verify that a short position in the European bear- spread option is hedged if the...
2. Consider a two-period binomial tree with u = 1.16, d = 0.96, So = 49, r = 0.07. Find the price of an American put with T = 2 and K = 50. (15 points)
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