You use the following information to construct a binomial forward tree for modeling the price movements of

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You use the following information to construct a binomial forward tree for modeling the price movements of a nondividend-paying stock:

(i) The length of each period is 6 months.

(ii) The current stock price is 80.

(iii) The stock’s volatility is 30%.

(iv) The continuously compounded risk-free interest rate is 8%.

Determine the replicating portfolio at the initial node of a 1-year at-the-money arithmetic average price Asian European call option on the stock, with the average calculated based on the stock prices in 6 months and in 1 year.

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Derivative Pricing

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Authors: Ambrose Lo

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Question Posted: Dec 07, 2023 06:08 AM

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You use the following information to construct a binomial forward tree for modeling the price movements of

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Derivative Pricing

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