Ask Question, Ask an Expert

+1-415-315-9853

info@mywordsolution.com

Ask Electrical & Electronics Expert

Strategies and Pricing:

1) A European put option is traded at $4 with the underlying price at $95. Time to expiry is one month and the strike is $100. The risk-free interest rate is 3% per annum. Devise a trading strategy to explore the arbitrage opportunity. What is the minimum profit of the strategy?

2) To hedge a Binary Call option B, a trader creates a call spread by short-selling a vanilla call option with the lower strike (below Binary's) λ1 < 0 and buying a call option with the higher strike λ2 > 0.

B + λ1C1 + λ2C2 = 0

(a) Construct a pay off diagram for a call spread that offsets a Binary Call with the strike $100.

Note: Use λ1 = -1 and λ2 = 1 to see the shape of the payoff.

(b) For the option prices listed in the table below, find symmetric values |λ1| = |λ2| that offset a payoff of exactly one Binary Call quoted in the market at B = $0:5.

Option   Strike   Maturity   Price

C1         $90       1             $14.81

C2         $110     1             $4.94

Construct a payoff diagram for a basket of all three options using the updated values of λ1, λ2.

3) Implement the multi-step Binomial Method to price a European put with the following parameters:

Strike K = 100 and maturity T = 1. Asset price level S0 = 100 and interest rate r = 0:05.

a) For the constant number of time steps in the tree NTS=4, find out the value of the option for a range of volatilities and plot the result.

b)  Then, x volatility at = 0.2 and plot the value of the option as a function of the number of time steps in the tree, NTS = 1, 2… 50. You will need a different tree for each NTS value.

Note: This is a computational task. Preferred solution method is a function written in VBA but Excel spreadsheets with binomial trees will be accepted given the plots are correct. For simplicity, use compound rate as a substitute to simple (discrete) rate.

Electrical & Electronics, Engineering

  • Category:- Electrical & Electronics
  • Reference No.:- M973

Have any Question? 


Related Questions in Electrical & Electronics

The pressure rise across a pump p this term is proportional

The pressure rise across a pump P (this term is proportional to the head developed by the pump) may be considered to be affected by the fluid density ρ, the angular velocity ω, the impeller diameter D, the volumetric rat ...

1 state and briefly discuss the basic definition of the

1. State and briefly discuss the basic definition of the curl of a vector. 2. What is a curl meter? How does it help visualize the behavior of the curl of a vector field? 3. Provide two examples of physical phenomena in ...

An auto lift consists of 3602-cm-diameter ram that slides

An auto lift consists of 36.02-cm-diameter ram that slides in a 36.04-cm-diameter cylinder. The annular region is filled with oil having a kinematic viscosity of 0.00037 m 2  /s and a specific gravity of 0.85. If the rat ...

1 discuss the relationship between b and h for a

1. Discuss the relationship between B and H for a ferromagnetic material. 2. Summarize the constitutive relations for a material medium. 3. What is the propagation constant for a material medium? Discuss the significance ...

In communication channels transmitted signal is propagated

In communication channels, transmitted signal is propagated simultaneously by several paths of varying lengths. This causes the signal to reach the destination with varying time delays and varying gains. Such a system ge ...

1 why is it necessary to have the minus sign associated

1. Why is it necessary to have the minus sign associated with the time rate of increase of magnetic flux on the right side of Faraday's law? 2. What is electromotive force? 3. What are the different ways in which an emf ...

If the shock-wave velocity in problem is approximated by

If the shock-wave velocity in Problem is approximated by the speed of sound, determine the pressure change causing a velocity change of 10 fps in (a) air at standard conditions; (b) water. Problem:- The shock wave illust ...

Compute and plot the solution of the difference equation yn

Compute and plot the solution of the difference equation y[n] þ y[n 1] = 2x[n] þ x[n 1], where x[n] = 0.8n u[n] assuming zero initial conditions. Moreover, verify your answer (a) by examining if the derived solution sati ...

When the potential energy of is given derive the

When the potential energy of is given, derive the variational equation using the principle of minimum potential energy. Problem :- Derive the weak form of a simply supported beam problem.

Consider a uniform bar with a cross-sectional area a 2

Consider a uniform bar with a cross-sectional area, A = 2 10 -4  m 2 , and a unit length, L = 1 m. The bar shows elastoplastic material behavior, as depicted in the figure. The plastic deformation starts at yield stress ...

  • 4,153,160 Questions Asked
  • 13,132 Experts
  • 2,558,936 Questions Answered

Ask Experts for help!!

Looking for Assignment Help?

Start excelling in your Courses, Get help with Assignment

Write us your full requirement for evaluation and you will receive response within 20 minutes turnaround time.

Ask Now Help with Problems, Get a Best Answer

WalMart Identification of theory and critical discussion

Drawing on the prescribed text and/or relevant academic literature, produce a paper which discusses the nature of group

Section onea in an atwood machine suppose two objects of

SECTION ONE (a) In an Atwood Machine, suppose two objects of unequal mass are hung vertically over a frictionless

Part 1you work in hr for a company that operates a factory

Part 1: You work in HR for a company that operates a factory manufacturing fiberglass. There are several hundred empl

Details on advanced accounting paperthis paper is intended

DETAILS ON ADVANCED ACCOUNTING PAPER This paper is intended for students to apply the theoretical knowledge around ac

Create a provider database and related reports and queries

Create a provider database and related reports and queries to capture contact information for potential PC component pro