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

Shafts are cut to length by two machines, A and B. Each machine cuts 50 percent of all shafts in approximately the same amount of time. Machine A's shafts are all good, but Machine

The descriptive statistics outputs for both the variables are as below: Wii Group Mean 95.8 Standard

Question: (a) Packs of food have weights that are distributed with standard deviation 2.3 g. A random sample of 200 packets is taken. The mean weight of this sample is found t

what are the characteristics

Conduct a test to determine if the proportion of males that responded true to the statement in the survey that, "Whole foods (i.e. raw vegetables and meats) contain sodium," is dif


Introduction of Management Accounting Management accounting or managing sales is worried with the conditions and use of sales details to professionals within companies, to off

what are different method of classifying overhead? indicate the advantag

Nortel is considering the purchase of a new call routing system. The system will cost $50M to purchase, an additional $7M to install, and will last for 30 years. The CCA rate assoc