Binomial and continuous model - mathematics of finance, Finance Basics

Assignment Help:

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).


Related Discussions:- Binomial and continuous model - mathematics of finance

Underwriting - stock market, Underwriting - Stock Market 1. This is th...

Underwriting - Stock Market 1. This is the supposition of risk relating unsubscribed shares 2. When new shares are issued, they might be beneath -written or unsubscribed. A

Logistics management - supply chain management, Logistics Management - Supp...

Logistics Management - Supply Chain Management The objectives of logistics management are to: Determine the best routes to market; air, rail or road Determine if w

Working Capital, AsStudents will analyze and synthesize the financial repor...

AsStudents will analyze and synthesize the financial reports of an organization of their choice and present their findings in a PowerPoint presentation (with completed Notes sectio

Capital market authority (cma), Capital Market Authority (CMA) Was est...

Capital Market Authority (CMA) Was established in 1990 with an Act of Parliament to assist, in creation of a conducive environment, for growth and development of capital marke

Payback period method - traditional methods, Payback Period Method - Tradit...

Payback Period Method - Traditional Methods This method gauges the viability of a venture via taking the outflows and inflows over time to ascertain how soon a venture can pay

Example of market model, Example of Market Model Illustration: For ...

Example of Market Model Illustration: For the past five (5) years, the MPS and DPS for XYZ Ltd were follows as:   1998 Shs. 1999 Shs.

Find out total amount of sales, Imagine Joy is the sales manager in a compu...

Imagine Joy is the sales manager in a computer retail company and has summarized for each sales transaction the following information: Sales person Date of sales Uni

Running own small businesss, how to do basic accountancy and what can i cla...

how to do basic accountancy and what can i claim back

Developer’s budget calculation, A prospective developer is considering purc...

A prospective developer is considering purchasing a site for the construction of a ‘Business Village’ at a price of £750 000. It will provide a let-able office floor space of 17 50

Public finance, models of solving externalities in 1) external sector 2)pr...

models of solving externalities in 1) external sector 2)private sector

Write Your Message!

Captcha
Free Assignment Quote

Assured A++ Grade

Get guaranteed satisfaction & time on delivery in every assignment order you paid with us! We ensure premium quality solution document along with free turntin report!

All rights reserved! Copyrights ©2019-2020 ExpertsMind IT Educational Pvt Ltd