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Solution 4.17 Parts 3 and 4
Solution 4.17 Parts 3 and 4
Huuuu
$182.21 $0.00 Huuu
$156.83 Huuud 8.5675535
$134.99 $16.85
Huu
$134.99 Huudu 11.903
$134.99 $0.00 Huud
$116.18 Huudd 15.250845
$100.00 $29.99 Hu
$116.18 Huduu 13.441071
$134.99 $0.00 Hudu
$116.18 Hudud 5.6878993
$100.00 $11.18
Hud
$100.00 Huddu 15.102
$100.00 $11.18 Hudd H
$86.07 Huddd 24.28187 $13.86
$100 $74.08 $37.10
Hduuu
$134.99 $0.00 Hduu
$116.18 Hduud 5.6878993
$100.00 $11.18 Hdu
$100.00 Hdudu 8.164
$100.00 $0.00 Hdud
$86.07 Hdudd 10.639003
$86.07 $74.08 $20.92
Hdduu Hd
$100.00 $0.00 Hddu 14.465747
$86.07 Hddud 10.639003
$74.08 $20.92 Hdd
$74.08 20.675
Hdddu
$74.08 $20.92 Hddd
$63.76 Hdddd 30.52735
$54.88 $40.12
Simultaneous solutions of the following two equations give us values for ∆ and B
Δ -0.297 Short sell uS R f B H u dS R f B H d
B 34.19409 Lend
High Five Put Value = ΔS+B or
High-5 Put Value $4.54 (confirms with value obtained above)
Hu Hd
IF THE UP STATE WAS FIRST OBSERVED:
Huu 0
u d S
Hud $11.18 uH d dH u
B
Δ -0.371 Short sell u d R f
B 42.82655 Lend
High Five Value = ΔS+B
High-5 Value $5.69
17 Consider a stock, XYZ, whose current price is $100 with volatility equal to 60% per annum. XYZ doe
(i) Consider a standard European option on XYZ with 3 months to maturity and exercise price E=100. W
(ii) What is the value of a put on XYZ with the same E and same time to maturity as the call?
(iii) The CBOE has recently approved the creation of a special European option on XYZ, which they are
for the highest stock price that occurred during the life of the option (inclusive of the date on which it
Assuming this option has a maturity of 3 months and there are four `trading periods' in this time period. What is th
(iv) If you were to attempt to replicate this option with a position in the XYZ stock and risk free debt. wha
S 100
E 100
VARIANCE SIGMA 0.36
RF 0.12
t 3
D1 0.8660254
D2 -0.17320508
ND1 0.80676188
ND2 0.43124512
CALL 50.5892377
PUT
D1 0.8660254 -0.8660254
D2 -0.17320508 0.17320508
ND1 0.80676188 0.19323812
ND2 0.43124512 0.56875488
PUT 37.551677
3
S $100
σ 0.6
rF 0.12
RF 1.0075282 =exp(rf* ∆ t)
T 0.25 =3/12
Periods 4
∆t 0.0625 =T / # of periods
u 1.16183424 u e T 4
T 4
d e
u e T 4
d 0.86070798 d e T 4
PRN 0.48757028 Rf d u Rf
1 - PRN p RN , and 1 p RN .
0.51242972 ud ud
ual to 60% per annum. XYZ does not pay dividends. The annual (not continuously compounded) risk free interest rate is 12%.
rity and exercise price E=100. What is the Black-Scholes value of the call option?
maturity as the call?
n option on XYZ, which they are calling a "High-Five". This high-five, on expiration, gives the holder the right to sell the underlying stock (XY
inclusive of the date on which it was issued) minus $5.00.
ds' in this time period. What is the price of this High-Five? (Hint use the Binomial model and remember that the Binomial model uses the per
YZ stock and risk free debt. what position would you initially construct? How would it change if the up state were first observed (context of t
he Binomial model uses the per period interest rate calculated on a simple compounding basis).
were first observed (context of this question is still the four period binomial model.