1. Explain the similarities and differences between pricing an option by its boundary conditions…

1. Explain the similarities and differences between pricing an option by its boundary conditions…

1. Explain the similarities and differences between pricing an option by its boundary conditions and using an exact option pricing formula.

A:

2. What is the principal benefit of a binomial option pricing model?

3. Describe the components of a hedge portfolio in the binomial option pricing model where the instrument being hedged is 1 a call and 2 a put

4. If the binomial model produces a call option price that is higher than the price at which the option is trading in the market, what strategy is suggested?

5. Discuss how a binomial model accommodates the possibility of the early exercise of an option.

1. Explain the similarities and differences between pricing an option by its boundary conditions…

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