Today’s class problem and solutions for parts A and B

Today, we worked on (among other things), parts A and B of the Option Pricing Class Problem. Here are the solutions for parts A and B (click on the image for a full-size PDF version that you can print out):

Be sure to bring your class problem with you to class next Tuesday. I will introduce a third method for pricing called the risk-neutral valuation approach which not only simplify the pricing problem for one timestep but also make it easier to calculate option prices for multiple timesteps. Spoiler alert – as we let the number of timesteps become arbitrarily large for a given discrete time interval, the famous Black-Scholes option pricing formula obtains.

Print Friendly, PDF & Email

Leave a Reply

Your email address will not be published. Required fields are marked *

This site uses Akismet to reduce spam. Learn how your comment data is processed.