Reference no: EM131848973
A Whoey pays the difference between the final price and the maximum price of a stock over the period of the asset. For example, if the price of a stock is 200, 220, and 234 in the previous periods (here periods 0, 1, and 2), the maximum price is 234, the final price is 234, and the asset would pay 234-234=0. If the price path is 200, 220, 200, the maximum price is 220, the final price is 200, and the asset would pay 20.
So given all this, you have a Whoey asset that expires in 2 periods where the stock price in period 0 is 55. The stock either moves up with u=1.25, or down with d=1/1.25. The interest rate is 8 percent. What is the value of your asset today in period 0?
An Asian option pays the maximum of either 0 or the difference between the final stock price and the average stock price along the relevant price path. For example, assume that the price path is 100, 80, 100. The average price is 280/3, and the option would pay (100-(280/3))=20/3. If the price path is 100, 125, 100, the average price is 325/3, and the option would pay 0.
So given all this, you have an Asian option that expires in 2 periods where the stock price in period 0 is 90. The stock either moves up with u=1.15, or down with d=1/1.15. The interest rate is 1/19. What is the value of your option today in period 0?
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