Quantitative Asset And Liability Modelling

d) European gap put option:

Stricke price = K1

Payment trigger = K2

Expiry date = T

Optimal payment level of trigger K2 =

GapPut(S,K1,K2,T) = K1e^-rT *N (-d2) –Se ^–dt N (-d1)

Suitable upper bond = [p <= K1*exp(-rt)]

e) Current price S0 = $ 20

Risk free force of interest = 3%

Continuously compounded real world drift = 7%

Volatility =15%

Time = 2 years

Following payoff:

30, if S1 > 23 and S2 < 1.25S1,

15, if S1 < 23 and S2 < 1.25S1,

0, otherwise .

Current value of option using the risk neutral sequential pricing approach

Answer:

Since the stock does not pay no dividend = So-Ke^-rT

C (So) = $ 20

Volatility = 0.15

d - a = .07

To seek the number S such that Pr( S0.5<St0.5) = 0.95

The random variable (s0.5/.20) is normally distributed with

Mean = (.07-0.5*0.15^2)*0.5 = 0.029375

Standard deviation = 0.15 * sqrt0.5 = 0.106066

Because N^-1 (0.95) = 1.645, we have

0.029375 + 0.106066 N^-1 (0.95) = 0.203854

Remember, at the center of any academic work, lies clarity and evidence. Should you need further assistance, do look up to our Accounting and Finance Assignment Help

Get It Done! Today

Applicable Time Zone is AEST [Sydney, NSW] (GMT+11)
Not Specific >5000
  • 1,212,718Orders

  • 4.9/5Rating

  • 5,063Experts

Highlights

  • 21 Step Quality Check
  • 2000+ Ph.D Experts
  • Live Expert Sessions
  • Dedicated App
  • Earn while you Learn with us
  • Confidentiality Agreement
  • Money Back Guarantee
  • Customer Feedback

Just Pay for your Assignment

  • Turnitin Report

    $10.00
  • Proofreading and Editing

    $9.00Per Page
  • Consultation with Expert

    $35.00Per Hour
  • Live Session 1-on-1

    $40.00Per 30 min.
  • Quality Check

    $25.00
  • Total

    Free
  • Let's Start

Get
500 Words Free
on your assignment today

Browse across 1 Million Assignment Samples for Free

Explore MASS
Order Now

My Assignment Services- Whatsapp Tap to ChatGet instant assignment help

refresh