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A chooser option is an option, which gives the option buyer a fixed period to decide whether the derivative will be a European call or
A chooser option is an option, which gives the option buyer a fixed period to decide whether the derivative will be a European call or put option. In particular, consider a binomial tree with So-100, u-120%, d 80% and r-10%. Suppose a chooser option with strike price K = 105 has a specified decision time n = 2, when the buyer has to decide whether this derivative will be a European call or put option. At the expiration time N 3 the option expires. If the buyer has chosen that it is a call option, then the payoff at time 3 is (S3 - K); otherwise, if the buyer has chosen that it is a put option, then the payoff at time 3 is (K - S3)+ 1. Determine the buyer's decision at time n 2. (Hint: the decision depends on wiw2.) 2. Price this chooser option at time 0, i.e., calculate Vo 3. Consider a European call option with the same strike price K 105, and expiration time 3. Price this call option at time 0, i.e., calculate Vo 4. Consider a European put option with the strike price , and expiration time 2. Price this +7 put option at time 0, i.e., calculate VOP. 5. Compare Vo with V Vo
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