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

1 read eye on inequality on p 512 and rank the influences

1. Read Eye on Inequality on p. 512 and rank the influences on the degree of income inequality-education, household size, household type, age of householder, race, and region of residence-in order of importance. 2. Which ...

1 suppose that a system is described by the impulse

1. Suppose that a system is described by the impulse response h(t) = 2sinc(t). Plot the magnitude of the frequency response of the system 2. Suppose that a system is described by the impulse response h(t) = 2sinc(t)sin(t ...

Hugo views donuts and coffee as perfect complements he

Hugo views donuts and coffee as perfect complements: He always eats one donut with a cup of coffee and will not eat a donut without coffee or drink coffee without a donut. Derive and plot Hugo's Engel curve for donuts. H ...

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 ...

1 find two differential length vectors tangential to the

1. Find two differential length vectors tangential to the surface at the point (2, 4, 1) and then find a unit vector normal to the surface at that point. 2. A hemispherical bowl of radius 2 m lies with its base on the xy ...

1 distinguish message authentication and entity

1. Distinguish message authentication and entity authentication. 2. Alice signs the message she sends to Bob to prove that she is the sender of the message. Which of the following keys does Alice need to use? a. Alice's ...

1 in a dht-based network assume node 4 has a file with key

1. In a DHT-based network, assume node 4 has a file with key 18. The closest next node to key 18 is node 20. Where is the file stored? a. in the direct method b. in the indirect method

1 briefly outline the reasoning used for the removal of the

1. Briefly outline the reasoning used for the removal of the inconsistency with Maxwell's equations of the intuitively derived fields due to the Hertzian dipole. 2. Discuss the characteristics of the complete electromagn ...

A voltage source vt 100 cos2pi50 t v is applied to a

A voltage source v(t) = 100 cos(2π50 t) [V] is applied to a nonlinear load, resulting in non-sinusoidal current: i(t) = 4 + 10 cos(2π50 t +30°) + 20 cos (4π50 t +45°) [A]. Determine: (a) the power absorbed on the load, ( ...

Download the matlab program ofdmallocm which simulates

Download the MATLAB program "ofdm_alloc.m", which simulates power and bit allocation for a 64 channel OFDM system, assuming that all channel symbol streams have equal power allocation P k = E [|s k [m]| 2 ] = 1, and that ...

  • 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

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

Describe what you learned about the impact of economic

Describe what you learned about the impact of economic, social, and demographic trends affecting the US labor environmen