ACT460H1 Lecture 10: PS2
Document Summary
F18 stochastic methods for actuarial science: homework 2. Instruction for submission: submit your solution as a hardcopy, but the spreadsheet and r program must be submitted on quercus. Please write your full name and student number on the front page, and keep a copy of your homework in case it gets lost. Homework after thursday noon will not be accepted: consider the three-period recombining binomial model with u = 3, d = 1 and r = 0. 2 throughout. The initial stock price is s0 = 30. Use risk-neutral pricing to compute the no-arbitrage price of the following derivative security. If the stock price at time 1 is s1 = 30, then the derivative pays at time 1 and nothing at times 2, 3. We have s0 = 16, s1(h) = 22, s1(t ) = 6, s2(hh) = 24, s2(ht ) = 16, s2(t h) = 10,
