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2
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1answer
315 views

A question about pricing convertible bond with two different underlying assets

I have a question regarding the pricing of convertible bond. If I value the convertible bond with two different underlying assets, how can I incorporate two volatility and the correlation in the ...
0
votes
1answer
47 views

Pricing of convertible bonds

I'm trying to evaluate a convertible bond using the structural approach : the price of convertible bond is an option (call) on the firm value. We suppose that the firm value is equal to the sum of the ...
2
votes
0answers
51 views

Does the Binomial Pricing Model require a no-arbitrage assumption?

In a binomial option model, if we take the uptick as 6%, downtick as 5% (assume equally probable), and RFR of 6% (continuous compounding), then we have a violation of $0 < d < 1 + r < u$. ...
2
votes
0answers
138 views

How to simulate a Geometric Binomial Process with state/tie dependent increments?

I want to simulate a geometric binomial process with state/time dependent increments. So the model is given by \begin{align}R_t=\frac{X_t}{X_{t-1}}\end{align} \begin{align}P(R_t=u)=p(X_{t-1},t) \...
1
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0answers
55 views

Replicating American call option

Consider a two-period binomial model for a risky asset with each period equal to a year and take $S_0 = 1$,$u = 1.2$, and $l=0.8$. The interest rate for both periods is $R = .05$ a.) If the asset ...
1
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0answers
42 views

Quantlib binomial tree

I was trying to price options with the extendedBinomialTree class of quantlib. I actually tried at some point to modify this class in order to optimize it. Normally the drift and diffusion of the ...
1
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0answers
41 views

negative transition probability in trinomial trees

I was pricing a option with big dividend in the underlying. However, I got negative transition probability in a trinomial tree. Will it cause arbitrage? Does anyone have reference paper or book ...
1
vote
0answers
50 views

Jabbour-Kramin-Young ABMC Binomial Parameterization

The JKY ABMC Model (taken from Jabbour, et al. 2001) parameterizes the binomial model (in a risk-neutral world) such that, $u = e^{r\Delta t} + e^{r\Delta t}\sqrt{e^{\sigma^2\Delta t} - 1}$ $d = e^{...
1
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0answers
89 views

Approximating the PDE price of an option with a binomial model

I'm trying to replicate, with a binomial model, the price of an option obtained with a PDE. It doesn't really work, so I was wondering, if there are some caveats when doing that. The PDE model use a ...
0
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0answers
21 views

Does the solution to this problem on floorlets have an error?

I'm self-studying and encountered the below problem and solution. I believe the payoff of the put at node $dd$ would be $(1.044)^{-1}\max(0.05 - 0.02, 0) = 0.019157088,$ and similarly the payoff at ...
0
votes
0answers
11 views

Zero coupon prices in 2-period binomial tree?

If I have a two-period binomial tree with given short rate process (i.e, rate on the bank account) and the equivalent martingale measure $Q$, what are the zero coupon prices at time t = 0? The reason ...
0
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0answers
52 views

Hull white tree and the pricing of an interest rate swap

Currently, I have been able to set up the hull white tree. To price the swap, and we use the formula from Wilmott "Introduces Quantitative Finance", where we use the discount factors for all ...
0
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0answers
39 views

Efficient construction of binomial tree

The goal is to build a $n$ step binomial tree knowing the end nodal probabibilities $p_1, \dots, p_m$, which correspond to the time $T$ states $S_1, \dots, S_m$. We assume that all paths ending in the ...
0
votes
0answers
29 views

Two-period pricing of a European put via riskless portfolio

The current price of a stock is $40. It is known that it either increases or decreases by 12.5% every 3-months over the next 6-month period. The risk-free rate of interest is 8% per annum (continuous ...