Here’s the Option Pricing Class Problem that I passed out in class today. We will be working more on this class problem during our next class meeting when we examine 1) the replicating portfolio approach to pricing a put option, 2) the “delta hedging” and “risk neutral valuation” approaches to pricing calls and puts, and 3) extending these models from a single period to multiple periods.
Today, we focused our attention on replicating portfolio approaches to pricing forward contracts and (single time-step) European call options. In the class problem, the latter concept appears in part B. Here’s the solution to part B:
According to the Replicating Portfolio Approach, and . Then .
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