Question
Consider the one step trinomial model from lecture with the following parameters: S 0 = 100 S u = 110 S m = 100 S
Consider the one step trinomial model from lecture with the following parameters:
S
0
= 100
S
u
= 110
S
m
= 100
S
d
= 90
p
u
= 0
.
4
p
d
= 0
.
3
M
0
= 1
M
u
=
M
d
=
M
m
= 1
.
05
Find all possible no-arbitrage values of a call option with strike
K
= 100.
Question 2:
Consider the following modification to the multistep binomial tree from lecture:
S
n
+1
=
S
n
e
t
+
tx
n
+1
where
x
n
takes values of 1 or
1 with probabilities
p
and 1
p
.
i) Find
p
such that the
N
-period logarithmic return has expected value (
1
2
2
)
T
.
ii) Find the risk-neutral branching probability. When using the risk-neutral probability, what is the
expectation of the
N
-period logarithmic return in the limit as
N
?
1
Annotations
Step by Step Solution
There are 3 Steps involved in it
Step: 1
Get Instant Access to Expert-Tailored Solutions
See step-by-step solutions with expert insights and AI powered tools for academic success
Step: 2
Step: 3
Ace Your Homework with AI
Get the answers you need in no time with our AI-driven, step-by-step assistance
Get Started