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

Questions -problem 1 - a series rlc network has r 2 komega

Questions - Problem 1 - A series RLC network has R = 2 kΩ, L = 40 mH and C = 1μF. Calculate the impedance at resonance and at one-fourth, one-half, twice, and four times the resonant frequency. Problem 2 - Design a serie ...

1 goalin this project you will solve a non-trivial design

1 Goal In this project you will solve a non-trivial design problem explicitly using the divide-and-conquer (D&C) approach. The main reason for using the D&C approach is the ease of the design process and the streamlined ...

1 a name the three major groups of contamination and

1. (a) Name the three major groups of contamination and briefly describe their physical characteristics. (b) Where do the above contamination types come from? Give one example of each. 2. Name two processes metrics which ...

Question 1 in the voltage regulator circuit in figure p221

Question 1: In the voltage regulator circuit in Figure P2.21, V 1 = 20 V, V Z = 10 V, R i = 222Ω and P z (max) = 400 mW. (a) Determine I L, I z , and I L , if R L = 380Ω. (b) Determine the value of R L , that will establ ...

Research report1 read 3 to 4 journal articles about

Research report 1. Read 3 to 4 journal articles about digital control or industrial control, eg. one particular application, implementation aspect such as selection of sampling time, hardware etc. No text book example is ...

Problem 1given a sequence xn for 0lenle3 where x0 1 x1 1

Problem # 1: Given a sequence x(n) for 0≤n≤3, where x(0) = 1, x(1) = 1, x(2) = -1, and x(3) = 0, compute its DFT X(k). (Use DFT formula, don't use MATLAB function) Problem # 2: Use inverse DFT and apply it on the Fourier ...

Problems -problem 1 - find v0 in the op amp circuit of fig

Problems - Problem 1 - Find v 0 in the op amp circuit of Fig. 1. Problem 2 - Compute i 0 (t) in the op amp circuit in Fig. 2 if v s = 4 cos(10 4 t). Problem 3 - If the input impedance is defined as Z in = v s /I s , find ...

Questions -problem 1 - determine the laplace transform ofa

Questions - Problem 1 - Determine the Laplace transform of: (a) cos(ωt + θ) (b) sin(ωt + θ) Problem 2 - Obtain the Laplace transform of each of the following functions: (a) e -2t cos(3t)u(t) (b) e -2t sin(4t)u(t) (c) e - ...

Assignment -problem 1 -a consider the simplified dc system

Assignment - Problem 1 - a) Consider the simplified dc system shown in Fig. 1. Only one converter is modeled, with the remote end represented by a dc source. The ac system is rated at 345 kV, with the converter transform ...

Summative assessmentin 2017 sej101 assessment will consist

Summative Assessment In 2017 SEJ101 assessment will consist of nine tasks that will develop a portfolio of your assessed work. Throughout the trimester you will have the opportunity for feedback on all nine tasks before ...

  • 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

Why might a bank avoid the use of interest rate swaps even

Why might a bank avoid the use of interest rate swaps, even when the institution is exposed to significant interest rate

Describe the difference between zero coupon bonds and

Describe the difference between zero coupon bonds and coupon bonds. Under what conditions will a coupon bond sell at a p

Compute the present value of an annuity of 880 per year

Compute the present value of an annuity of $ 880 per year for 16 years, given a discount rate of 6 percent per annum. As

Compute the present value of an 1150 payment made in ten

Compute the present value of an $1,150 payment made in ten years when the discount rate is 12 percent. (Do not round int

Compute the present value of an annuity of 699 per year

Compute the present value of an annuity of $ 699 per year for 19 years, given a discount rate of 6 percent per annum. As