College Algebra
College Algebra
1st Edition
ISBN: 9781938168383
Author: Jay Abramson
Publisher: OpenStax
Bartleby Related Questions Icon

Related questions

Question
[画像:This problem is based on the fundamental option pricing formula for the continuous-time model developed in class, namely the value at time 0 of an option with maturity T and payoff F is given by: We consider the two options below: Fo= -rT = e Eq[F]. 1 A. An option with which you must buy a share of stock at expiration T = 1 for strike price K = So. B. An option with which you must buy a share of stock at expiration T = 1 for strike price K given by T K = T St dt. (Note that both options can have negative payoffs.) We use the continuous-time Black- Scholes model to price these options. Assume that the interest rate on the money market is r. (a) Using the fundamental option pricing formula, find the price of option A. (Hint: use the martingale properties developed in the lectures for the stock price process in order to calculate the expectations.) (b) Using the fundamental option pricing formula, find the price of option B. (c) Assuming the interest rate is very small (r ~0), use Taylor expansions to find the first order approximation in r of the two results in (a) and (b). (d) Can we intuitively explain the relationship between the two formulas obtained in part (c) ?]
expand button
Transcribed Image Text:This problem is based on the fundamental option pricing formula for the continuous-time model developed in class, namely the value at time 0 of an option with maturity T and payoff F is given by: We consider the two options below: Fo= -rT = e Eq[F]. 1 A. An option with which you must buy a share of stock at expiration T = 1 for strike price K = So. B. An option with which you must buy a share of stock at expiration T = 1 for strike price K given by T K = T St dt. (Note that both options can have negative payoffs.) We use the continuous-time Black- Scholes model to price these options. Assume that the interest rate on the money market is r. (a) Using the fundamental option pricing formula, find the price of option A. (Hint: use the martingale properties developed in the lectures for the stock price process in order to calculate the expectations.) (b) Using the fundamental option pricing formula, find the price of option B. (c) Assuming the interest rate is very small (r ~0), use Taylor expansions to find the first order approximation in r of the two results in (a) and (b). (d) Can we intuitively explain the relationship between the two formulas obtained in part (c) ?
Expert Solution
Check Mark
Knowledge Booster
Background pattern image
Recommended textbooks for you
Text book image
College Algebra
Algebra
ISBN:9781938168383
Author:Jay Abramson
Publisher:OpenStax
Text book image
Algebra & Trigonometry with Analytic Geometry
Algebra
ISBN:9781133382119
Author:Swokowski
Publisher:Cengage
Text book image
Intermediate Algebra
Algebra
ISBN:9780998625720
Author:Lynn Marecek
Publisher:OpenStax College
Text book image
Intermediate Algebra
Algebra
ISBN:9781285195728
Author:Jerome E. Kaufmann, Karen L. Schwitters
Publisher:Cengage Learning
Text book image
Algebra and Trigonometry (MindTap Course List)
Algebra
ISBN:9781305071742
Author:James Stewart, Lothar Redlin, Saleem Watson
Publisher:Cengage Learning
Text book image
Functions and Change: A Modeling Approach to Coll...
Algebra
ISBN:9781337111348
Author:Bruce Crauder, Benny Evans, Alan Noell
Publisher:Cengage Learning