Class Notes (807,170)
ACT370H1 (9)
Jack Pitt (9)
Lecture

# January 20.docx

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School
University of Toronto St. George
Department
Actuarial Science
Course
ACT370H1
Professor
Jack Pitt
Semester
Winter

Description
January 20, 2014 S0 S0u S0d S0uu S0ud S0dd - Find Suu, Sud, Sdd, etc. - Compare to K [itm] S-K or K-S, [otm] 0 - Take the terminal option values and probabilities and work backwards Terminal value: expiration -> [call] max(S-K,0), [put] max(K-S,0) Example 10 Hull European call, same values as before S0= 20 K = 21 u = 1.1 d = 0.9 r = 0.12 T = 6/12 (2 periods of 3 months) p = 0.6522727 = P(U) 20 22 18 24.2 19.8 16.2 3.20 0 0 Value of call A B C D E F C B e -0.12*(3(0.652*3.2 + 0.3478*0) = 0.2025584 => value at point B -0.12*(3/12) C A e (0.652*2.2025584 + 0.348*0) = 1.282185 => value of call at t=0 Note: A does not mean American call -0.12*2*(3/12) 2
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