. (Replicating strategy for pricing) To price a derivative, we can use risk-neutral pricing. As an alternative yet equivalent method, we can construct price the derivative using replicating strategies. Consider a 1-period binomial model, where we have three nodes No,0, N1,0, N1,1. We have a cash account with fixed interest rate r = 0.01 - that is, if we have at No,o cash account with D dollars, we expect (1 + r)D at either N1,0 or N1,1. We also have a stock with price S0,0 = 10 at No,0, S1,0 = 8 at N1,0 and $1,1 = 15 at N₁,1. Now consider an European call option at time t = 1 with strike K = 12. Can you price the option at No,o using a replicating strategy, and what is the price? Please submit your answer rounded to only one decimal digit - for example if your answer is 1.28, then submit 1.3. If your answer is 1.12, submit 1.1.

. (Replicating strategy for pricing) To price a derivative, we can use risk-neutral pricing. As an alternative yet equivalent method, we can construct price the derivative using replicating strategies. Consider a 1-period binomial model, where we have three nodes No,0, N1,0, N1,1. We have a cash account with fixed interest rate r = 0.01 - that is, if we have at No,o cash account with D dollars, we expect (1 + r)D at either N1,0 or N1,1. We also have a stock with price S0,0 = 10 at No,0, S1,0 = 8 at N1,0 and $1,1 = 15 at N₁,1. Now consider an European call option at time t = 1 with strike K = 12. Can you price the option at No,o using a replicating strategy, and what is the price? Please submit your answer rounded to only one decimal digit - for example if your answer is 1.28, then submit 1.3. If your answer is 1.12, submit 1.1.

International Financial Management

14th Edition

ISBN:9780357130698

Author:Madura

Publisher:Madura

Chapter5: Currency Derivatives

Section: Chapter Questions

Problem 32QA

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