April 2011
Intermediate to advanced
328 pages
9h 5m
English
Content preview from Risk Analysis in Finance and Insurance, 2nd Edition
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Problems 275
Problem A.3.2 Consider a 1-step binomial (B,S)-market with B
0
=1,
S
0
= 100, r =0.2,and
S
1
=
150 with probability 0.4
70 with probability 0.6
.
Consider a contingent claim f
1
= S
1
− min{S
0
,S
1
}.Find
(a) Heuristic price of f
1
.
(b) Replicating portfolio and the initial capital of this strategy.
(c) Fair price using a martingale probability.
Problem A.3.3 Consider a 1-step binomial (B,S)-market with B
0
=1,
S
0
= 200, r =0.2, a = −0.4, b =0.6, and a contingent claim (look-back
call option) f
1
=(S
1
− K
1
)
+
,whereK
1
=min{S
0
,S
1
}.Find
(a) A risk-neutral probability.
(b) Fair price of f
1
.
(c) Determine also heuristic prices of this option for initial probabilities p =
0.8 and p =0.3. Comparing the results with (b) can you explain why
this simplistic approach can not ...
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