Second edition p.154

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Second edition p.154

Postby tfs13952 » Sat Apr 06, 2013 8:05 am

Hi Mark,

On this page you explained that to make the trinomial tree complete we need the price of a call option. I seem to understand this. However, the option's strike must be within 80-120, otherwise "the option then loses its non-linearity and can be replicated as a linear multiple of stock and bond ...". I'm not quite sure why the strike must be from 80 to 120. Thanks.
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Re: Second edition p.154

Postby mj » Sat Apr 06, 2013 9:48 am

if the strike is outwith that range the pay-off is a multiple of stock and bond so it doesn't help you.
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Re: Second edition p.154

Postby tfs13952 » Sun Apr 07, 2013 3:50 pm

mj wrote:if the strike is outwith that range the pay-off is a multiple of stock and bond so it doesn't help you.


By the replication argument or risk-neutral argument, should this range be 90-110 instead? Since if the strike is 81, it seems that we could still calculate a unique set of solution for holdings of stock and bond to replicate the payoffs of the option. I'm not sure if I get this right?
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Re: Second edition p.154

Postby mj » Mon Apr 08, 2013 5:37 am

i think you have an old printing, in the current printing it says 90-110.
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Re: Second edition p.154

Postby tfs13952 » Fri Apr 12, 2013 5:03 am

Oh really? I didn't notice that. Thank you very much.
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