ACT460H1 Lecture Notes - Lecture 10: Cumulative Distribution Function, Risk Neutral, Call Option
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F18 stochastic methods for actuarial science: homework 2. 5. You do no need to submit this homework; it is for practice only: consider the 1-period trinomial model so that = {h, e, t }. S0 = 36, s1(h) = 54, s1(e) = 42 and s1(t ) = 30. Consider a call option expiring at time 1 and with strike price 36. Also consider a put option expiring at time 1 and with strike price 42. (a) find the range of no-arbitrage prices for the call option. Do this by an arbitrage argument (and not using risk-neutral measures). (b) suppose the market price of the call option is 6. Find the price of the put option using a replication argument. (c) find all the risk-neutral measures q. You should write down q( ) for all . (d) find the range of no-arbitrage prices for the call option using risk-neutral pricing.
