please help In the 3-period model (S_0 = 4, u = 2, d= 1/2), let the interest rat

Question

please help

In the 3-period model (S_0 = 4, u = 2, d= 1/2), let the interest rate be r = 1/4 so the risk-neutral probabilities are p^Tilde = q^Tilde = 1/2. Determine the price at time 0, denoted V_0^P, of the American put that expires at time 3 and has intrinsic value gP(s) = (5 minus s)^+. Determine the price at time 0, denoted V_0^C, of the American call that expires at time 3 and has intrinsic value gC(s) = (s minus 5)^+. Determine the price at time 0, denoted V_0^S, of the American straddle that expires at time 3 and has intrinsic value gS(s) = gP(s) + gC(s). (Don't pay much attention to the word "straddle". Just consider what the intrinsic value corresponding to the straddle is.)

Explanation / Answer

1. The American put has price V P 0 = 2:56. The answer is achieved through modi-fying the code from project 2, code is attached.

2. The American call has price V C 0 = 0:928.

3. The American straddle has price V S 0 = 3:296.

Related Questions

Navigate

• Browse (All)
• Browse P
• Subjects

---

---

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.