The past few months, I have been taking the financial engineering course offered by Columbia. It is a great course but there is a huge disconnect between the theory they teach and the questions then asked in their quizzes.

I have been stuck on the following problems for over a week now and would appreciate any hints or links to resources that explain the theory (it in not at all covered in the material they provide).

Context: We are meant to build a 15-period binomial model whose parameters should be calibrated to a Black-Scholes geometric Brownian motion model with the following features: T=.25 years, S0=100, r=2%, σ=30% and a dividend yield of c=1%.

  1. Compute the fair value of an American call option with strike K=110 and maturity n=10 periods where the option is written on a futures contract that expires after 15 periods. The futures contract is on the same underlying security of the previous questions.

  2. Compute the fair value of a chooser option which expires after n=10 periods. At expiration the owner of the chooser gets to choose (at no cost) a European call option or a European put option. The call and put each have strike K=100 and they mature 5 periods later, i.e. at n=15.



Your Answer

By clicking "Post Your Answer", you acknowledge that you have read our updated terms of service, privacy policy and cookie policy, and that your continued use of the website is subject to these policies.

Browse other questions tagged or ask your own question.