Homework Set 2
Math 456
Topics in Financial Mathematics
Prof. Wickerhauser
Read Chapters 3 and 4 of the textbook, "Binomial Models In Finance" by
John van der Hoek and Robert J. Elliott
Do the following exercises from the textbook Chapter 3.5, pp.61--64:
Exercise 3.22.
Exercise 3.25.
Exercise 3.26.
Do the following exercises from the textbook Chapter 4.11, pp.78--80:
Exercise 4.11.
There is an error in the original problem. To fix it, use K=S=$90
throughout instead of K=$100. Then find sigma so that P(0)=$3.08 and
another sigma so that P(0)=$5.00.
Note: the price of an in-the-money American option cannot be less than
the immediate exercise payoff, otherwise there is an obvious
arbitrage. With S=$90 and K=$100, therefore, we cannot have P(0)<$10.
Exercise 4.12.
Exercise 4.14.
Exercise 4.16.
Exercise 4.17.