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.