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Exercise 2.9. Price the following American put option using the tree model: stock price now is So = 100, (1) Construct the 3-level tree (1
Exercise 2.9. Price the following American put option using the tree model: stock price now is So = 100, (1) Construct the 3-level tree (1 level per month) if the stock price is expected to either go up by 10% (2) Describe the hedging procedure undertaken by a writer of the option who seeks to eliminate risk. strike is E = 115, interest rate is 5%, time to expiration 3 months. or go down by 5%. Price the above option using this tree. You must assume that the holder of the option will do what is best for them (i.e. exercise early if optimal). Consider the price paths: (a) Up, Down, Up Exercise 2.9. Price the following American put option using the tree model: stock price now is So = 100, (1) Construct the 3-level tree (1 level per month) if the stock price is expected to either go up by 10% (2) Describe the hedging procedure undertaken by a writer of the option who seeks to eliminate risk. strike is E = 115, interest rate is 5%, time to expiration 3 months. or go down by 5%. Price the above option using this tree. You must assume that the holder of the option will do what is best for them (i.e. exercise early if optimal). Consider the price paths: (a) Up, Down, Up
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