Ask Question
8 August, 21:47

10.12 Let S = $100, K = $95, r = 8% (continuously compounded), σ = 30%, δ = 0, T = 1 year, and n = 3. a. Verify that the binomial option price for an American call option is $18.283. Verify that there is never early exercise; hence, a European call would have the same price. b. Show that the binomial option price for a European put option is $5.979. Verify that put-call parity is satisfied. c. Verify that the price of an American put is $6.678.

+5
Answers (1)
  1. 8 August, 21:54
    0
    American Put Value

    N. down moves 3 2 1 0

    0 0 0 1.09077967 6.677901

    1 0 2.0623567169 11.7087201

    2 3.8993348796 20.4035172625

    3 30.5715733249

    Explanation:

    Let S = $100, K = $95, r = 8% (continuously compounded), σ = 30%, δ = 0, T = 1 year, and n = 3. a. Verify that the binomial option price for an American call option is $18.283. Verify that there is never early exercise; hence, a European call would have the same price. b. Show that the binomial option price for a European put option is $5.979. Verify that put-call parity is satisfied. c. Verify that the price of an American put is $6.678.

    Let S0 = $100, K = $95, r = 8% (continuously compounded), σ = 30%, δ = 0, T = 1 year, and n = 3.

    a. Confirm that the binomial option price for an American call option is$18.283. Hint: there is no early exercise; therefore, a European call would have the same price.

    S0 100

    K 95

    σ 0.3

    δ 0

    u 1.2212461202

    d 0.8636925537

    r 0.08

    T 1

    n 3

    h 0.3333333333

    p * 0.4568066592

    American Call Value

    N. down moves 3 2 1 0

    0 87.1417860953 56.6440624107 33.1493175 18.28255

    1 33.8147423997 15.0403285537 6.6897296

    2 0 0

    3 0

    European Call Value

    N. down moves 3 2 1 0

    0 87.1417860953 56.6440624107 33.1493175 18.28255

    1 33.8147423997 15.0403285537 6.6897296

    2 0 0

    3 0

    The American option is never exercised early, and the American and European values are the s.

    b. Demonstrate that the binomial option price for a European put option is 5.979%. Verify that put-call parity is satisfied.

    European Put Value

    N. down moves 3 2 1 0

    0 0 0 1.09077967 5.978605

    1 0 2.0623567169 10.3865484

    2 3.8993348796 17.903663451

    3 30.5715733249

    Put call parity:

    C - P: 12.3039470933

    S-Ke^ ( - (r-5) T) 12.3039470933

    c. Confirm that the price of an American put is $6.678

    American Put Value

    N. down moves 3 2 1 0

    0 0 0 1.09077967 6.677901

    1 0 2.0623567169 11.7087201

    2 3.8993348796 20.4035172625

    3 30.5715733249
Know the Answer?
Not Sure About the Answer?
Find an answer to your question 👍 “10.12 Let S = $100, K = $95, r = 8% (continuously compounded), σ = 30%, δ = 0, T = 1 year, and n = 3. a. Verify that the binomial option ...” in 📗 Business if the answers seem to be not correct or there’s no answer. Try a smart search to find answers to similar questions.
Search for Other Answers