Finance Assignment | Professional Writing

4. Consider a stock in the 3-period binomial model with u 1.5, d = 0.5, r = 0.25, and So = 16. Consider a 3-period American put with strike price 12. (a) Work out the full intrinsic value tree for this put. Leave numerical values as simplified fractions; denominators should all be powers of 5. (b) Work out the full value process tree for this put. Leave numerical values as simplified fractions; denominators should all be powers of 5. (c) In each state, determine whether it is more valuable to exercise the put, hold the put another period, or if both have the same value. Next to each node on your value process tree, write “stop”, write “go”, or write nothing, to summarize your determinations. (d) Explicitly define an optimal stopping time for this put, consistent with your analysis. hw9.pdf (114 KB) Page < 4 > of 7 0 – ZOOM 9.3.

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Consider a stock in the 3-period binomial model with the following statistics: So = 10,u = 1.5.d = 0.5, r = 0.1 Define a security’s intrinsic value process by Go = 0 and G =0.5(S. + S-1) for n > 0. (n) Write out the intrinsic value process (G)” on a tree, and prove that the security is path-dependent according to the official definition. Note: this means that you need to show that there is no function for all n and for all w we have 9 (S.(w)) – G w ). : R R such that nodule_item_id=3562401 2.pdf Page < 5 > of 7 | 0 – ZOOM (b) Determine the value process (..) of the security using the (simplified) pricing algorithm for American securities and write it out on a second tree. “module_item_id=3562401 9.pdf KB) Page < 6 > of 7 0 – ZOOM (e) Determine the stopping time T that satisfies the following rule: stop the first time you se E. (Vn+1V) SG

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