Find a strategy which replicates the payoff, Basic Statistics

Rocco works for an international arms dealer who has just publicly listed. What with the world being how it is these days, there's money to be made on more than just selling the tools of mass destruction. The price of a Guns'R'U.S. share, S, is $3 today. It will either double or halve depending on whether a secret arms deal with a secret international organisation (represented by someone calling themselves Albert Kaida, or some such. Just call him "Al") goes through. Fearing an American putdown, Rocco must price an American Put option on S, expiring at time 3 using a 3 period Binomial Tree. Assume interest rates are zero. Who pays interest these days? Rocco looks confused. CTF was beyond him. It would be beyond anyone having only a primary school education. He needs your help. The security of the world is in your hands. Or at least a lot of money for Rocco and his associates (and you if you play your cards right).

a) When should someone exercise the option early? Why?

b) Define the Stopping Time in the American Option Pricing algorithm.

c) Show that the discounted American price process is a supermartingale.

d) Show that the discounted Stopped American price process is a martingale.

e) Find a strategy which replicates the payoff of the American Put.

f) Show that this results in additional income if the option is not exercised at the optimal time.

 

Posted Date: 3/1/2013 6:57:21 AM | Location : United States







Related Discussions:- Find a strategy which replicates the payoff, Assignment Help, Ask Question on Find a strategy which replicates the payoff, Get Answer, Expert's Help, Find a strategy which replicates the payoff Discussions

Write discussion on Find a strategy which replicates the payoff
Your posts are moderated
Related Questions
Use the data in the BWGHT.txt for this question. The variable descriptions are given in the file BWGHT_variables.txt. There are 1388 observations in this dataset. (a) Run the regre

Mention the characteristics of Statistics. Explain any two applications of Statistics

How to start solving the null hypothesis that the mean daily caloric intake in the adult population of a rural county is 1800 calories. A sample of 400 had a mean of 1785 and SD 24

The Rohr Company''s old equipment for making subassemblies is worn out. The company is considering two alternatives: a) Completely replacing the old equipment with new equipment

What is a Business-type activity Reported in the government-wide financial statements. Financed in whole or in part by fees charged to external parties for goods or services that

Prior to the last payroll period of the calendar year, the cumulative earnings of Employer A were $105000. The earnings for the last payroll period of the year which will be paid o

Fenn Museum, a nongovernmental not-for-profit organization, had the following balances in its statement of functional expenses: Education $300,000 Fundraising 250,000 Management an

Mention four characteristics and functions of statistics

What is cut-off date A chosen manually date whereby transactions usually are stopped to give for closing of the books of accounts for a known period: for audit purposes,

Bob Smith recently completed his MBA and accepted a job with a computer company. To ensure that his retirement is comfortable, he intends to invest $3,000 of his salary into a tax