[Solved] MA374 Lab 2

1. Write a program to determine the initial price of an European call and an European put option in the binomial model with the following data :

S(0) = 100;K = 100;T = 1;M = 100;r = 8%; = 20%.

Use the following two sets of u and d for your program.

• Set 1 : u = e ^t ; d = e ^t.
• Set 2 :.

Here t = _M^T , with M being the number of subintervals in the time interval [0,T]. Use the continuous compounding convention in your calculations (i.e., both in pand in the pricing formula).

Now, carry out a sensitivity analysis of the initial price as follows: Plot the initial prices of both call and put options (for both the above sets of u and d) by varying one of the parameters at a time (as given below) while keeping the other parameters fixed (as given above):

• S(0).
• K.
• r.
• .
• M (Do this for three values of K, K = 95,100,105).

Please do plots in 3-D also (by considering two parameters at a time).

2. Now take any path-dependent derivative of your choice and do the above exercise for both set of (u,d).