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Horseface
October 2nd 2007, 05:55 PM
Ok I know in a regular option u = e^[(r-delta)*h+sigma*(root of h)]

but I'm solving a problem 4.16 in the asm manual on page 69

It says the underlying stocks value is 200 not the value of the future agreement. shouldn't my u be the same as above and not

u = e^(sigma*root of h) the reason this increase lacks the beginning terms is because we don't need to carry the stock forward. But in this problem doesn't the stock still need to be carried forward?

I guess what I'm asking; is this a typo.

econguy
October 3rd 2007, 03:42 PM
Ok I know in a regular option u = e^[(r-delta)*h+sigma*(root of h)]

but I'm solving a problem 4.16 in the asm manual on page 69

It says the underlying stocks value is 200 not the value of the future agreement. shouldn't my u be the same as above and not

u = e^(sigma*root of h) the reason this increase lacks the beginning terms is because we don't need to carry the stock forward. But in this problem doesn't the stock still need to be carried forward?

I guess what I'm asking; is this a typo.

I guess this is not a typo. The underlying security is futures in this problem and stated clearly ("one year call option on a futures contract"). Stock price is given just to find forward price.

Horseface
October 4th 2007, 05:49 AM
I guess this is not a typo. The underlying security is futures in this problem and stated clearly ("one year call option on a futures contract"). Stock price is given just to find forward price.

Exactly so taking the stock forward

S*e^(r-d)*h-sigma*root of h

should work to get up and down moves but it doesn't