Binomial and continuous model - mathematics of finance, Finance Basics

Consider a binomial model of a risky asset with the parameters r = 0:06, u = 0:059, d = 0:0562, S0 = 100, T = 1, 4t = 1=12. Note that u and d are monthly effective rates of return and r is the annual effective risk-free interest rate.

(1) Determine the price of a European put option with strike price X = 98 on the above non-dividend paying asset at time 0 and find x(1); y(1), i.e., the number of shares of the stock and risk-free asset needed at time 0 to replicate the European option over the first time-step.

(2) Compute the Black-Scholes price of a European put option with the above specifications and report the relative error between the price obtained in (1) and the Black-Scholes price, i.e., compute,

2489_Binomial and Continuous Model.png

compute x(1); y(1), i.e., the number of shares of the stock and risk-free asset needed at time 0 to instantaneously delta hedge the European put option. Compare x(1); y(1) with the values computed in part (1).

Posted Date: 3/13/2013 6:21:46 AM | Location : United States







Related Discussions:- Binomial and continuous model - mathematics of finance, Assignment Help, Ask Question on Binomial and continuous model - mathematics of finance, Get Answer, Expert's Help, Binomial and continuous model - mathematics of finance Discussions

Write discussion on Binomial and continuous model - mathematics of finance
Your posts are moderated
Related Questions

Opportunity Cost or Residual Loss It is the cost due to the failure of both parties to act optimally like as in example of A. Lost opportunities because of incapability to

ROE - Return on Equity The average of the industry ROE was 21.38% for 2004, 24.99% for 2005, and 23.56% for 2006. The chart showed that after the acquisition of IBM PC di

Growth and Valuation Ratio This ratio indicates the growth potential of the firm in addition to determining the value of the firm and investment made via various investors.  T

1. A stock pays no dividend and is expected to be sold for $50 after 4 years. If the investor's RRR is 12%, at what price is he/she willing to buy it? 2. ABC company has its ROE

What are the Functions of Stock Exchange Main functions performed b stock exchange are as follows: (1) Providing Liquidity and Marketability to existing securities: Sto

Conservative Approach - Financing Current Assets An exact similar of asset life along with the life of the funds required to finance the asset may not be possible. A firm that

Instructions: Read the Herzberg findings related to extrinsic and intrinsic factors driving job satisfaction, dissatisfaction and motivation. To what extent should employers feel r

Example of Earnings Yield Valuation Estimated maintainable earnings are £240,000 per annum; rate of return required is 25 percent. Calculate the value of the business. V