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• Internal Code :
• Subject Code : ACST3007
• University : Macquarie University
• Subject Name : General Accounting and Finance

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

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

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