6 Consider a CRR model with T 2, So $100, S1 $200 or S $50 (the same model as in Exercise 2) Now consider an American put option with strike price K $120 Assume that the risk free interest rate is r 0 1 (a) Use a binary tree to compute the arbitrage free initial price of the American put option (b) Determine an explicit superhedging strategy o for this option (c) Suppose that you can buy the American put option at time zero for $1 less than its arbitrage free price Explicitly describe a strategy that yields an arbitrage opportunity for a buyer of the American put option (d) Try to automate the arbitrage free pricing of an American put option in a computer program where T, So, u, d and K are variables 6 Consider a CRR model with T 2, So $100, S1 $200 or S $50 (the same model as in Exercise 2) Now consider an American put option with strike price K $120 Assume that the risk free interest rate is r 0 1 (a) Use a binary tree to compute the arbitrage free initial price of the American put option (b) Determine an explicit superhedging strategy o for this option (c) Suppose that you can buy the American put option at time zero for $1 less than its arbitrage free price Explicitly describe a strategy that yields an arbitrage opportunity for a buyer of the American put option (d) Try to automate the arbitrage free pricing of an American put option in a computer program where T, So, u, d and K are variables

Question

6  Consider a CRR model with T   2, So   $100, S1   $200 or S   $50 (the same model as in Exercise 2)  Now consider an American put option with strike price K   $120  Assume that the risk free interest rate is r   0 1  (a) Use a binary tree to compute the arbitrage free initial price of the American put option  (b) Determine an explicit superhedging strategy o  for this option  (c) Suppose that you can buy the American put option at time zero for $1 less than its arbitrage free price  Explicitly describe a strategy that yields an arbitrage opportunity for a buyer of the American put option (d) Try to automate the arbitrage free pricing of an American put option in a computer program where T, So, u, d and K are variables  6  Consider a CRR model with T   2, So   $100, S1   $200 or S   $50 (the same model as in Exercise 2)  Now consider an American put option with strike price K   $120  Assume that the risk free interest rate is r   0 1  (a) Use a binary tree to compute the arbitrage free initial price of the American put option  (b) Determine an explicit superhedging strategy o  for this option  (c) Suppose that you can buy the American put option at time zero for $1 less than its arbitrage free price  Explicitly describe a strategy that yields an arbitrage opportunity for a buyer of the American put option (d) Try to automate the arbitrage free pricing of an American put option in a computer program where T, So, u, d and K are variables

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6. Consider a CRR model with T = 2, So = $100, S1 = $200 or S = $50 (the same model as in Exercise

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