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[solution] » 1.Compute the fair value of an American call option with strike

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1.Compute the fair value of an American call option with strike

1.Compute the fair value of an American call option with strike K=110 and maturity n=10 periods where the option is written on a futures contract that expires after 15 periods. The futures contract is on the same underlying security of the previous questions.

2.Compute the fair value of a chooser option which expires after n=10 periods. At expiration the owner of the chooser gets to choose (at no cost) a European call option or a European put option. The call and put each have strike K=100 and they mature 5 periods later, i.e. at n=15.

Information: should be answered by building a 15-period binomial model whose parameters should be calibrated to a Black-Scholes geometric Brownian motion model with: T=.25 years, S0=100, r=2%, ?=30%

and a dividend yield of c=1%.


Your binomial model should use a value of u=1.0395.... (This has been rounded to four decimal places but you should not do any rounding in your spreadsheet calculations.)


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