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Only Part C please! Thanks 10.1. You wish to purchase some options on a stock that satisfies the following: S(0) = 20 r-o = 0.04
Only Part C please! Thanks
10.1. You wish to purchase some options on a stock that satisfies the following: S(0) = 20 r-o = 0.04 0 = 0.25 For a six month European call on S with strike 20, Ac = 0.56779 (a) What is the price of a strike 20 asset or nothing call? (b) What is the price of a strike 20 cash or nothing call? A gap option is a derivative that has a strike, style, expiration, and an underlying asset. Because it shares all of the characteristics of calls and puts, we call them gap calls and gap puts. A gap call has a payoff when the underlying asset is greater than the strike, and a gap put has a payoff when the underlying asset is less than the strike. The actual payoff is a vertical shift of a call/put option. The payoff can be replicated using asset or nothing and cash or nothing options. (c) Construct a portfolio consisting of asset or nothing and cash or nothing options to replicate the payoff of a gap call option that pays S(0.5) 15 at time 0.5 when S(0.5) > 20 and zero otherwise. Use this replicating portfolio to determine the price of the gap call. 10.1. You wish to purchase some options on a stock that satisfies the following: S(0) = 20 r-o = 0.04 0 = 0.25 For a six month European call on S with strike 20, Ac = 0.56779 (a) What is the price of a strike 20 asset or nothing call? (b) What is the price of a strike 20 cash or nothing call? A gap option is a derivative that has a strike, style, expiration, and an underlying asset. Because it shares all of the characteristics of calls and puts, we call them gap calls and gap puts. A gap call has a payoff when the underlying asset is greater than the strike, and a gap put has a payoff when the underlying asset is less than the strike. The actual payoff is a vertical shift of a call/put option. The payoff can be replicated using asset or nothing and cash or nothing options. (c) Construct a portfolio consisting of asset or nothing and cash or nothing options to replicate the payoff of a gap call option that pays S(0.5) 15 at time 0.5 when S(0.5) > 20 and zero otherwise. Use this replicating portfolio to determine the price of the gap callStep by Step Solution
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