Hi There!
I'm working my way through the ASM manual and am at lesson 12. I'm using the seventh edition (if it makes a difference) and am not understanding something in example 12F of subsection 12.3.
Why do they state that C(Sud,2h)=0
Is it because Sud=48 which is below 50 (the strike price of the call in question)? Therefore the call is useless? I thought that you would have to calculate the price at node (Sud, 2h) like any other binomial tree discounting the values of the call at Sudu (57.6-50=7.6) and Sudd (38.4-50=negative so we use 0) using p*?
Please let me know how they made this assumption and please let me know if you need any further clarification! I'd be happy to help you help me.
Thanks in advance.
I'm working my way through the ASM manual and am at lesson 12. I'm using the seventh edition (if it makes a difference) and am not understanding something in example 12F of subsection 12.3.
Why do they state that C(Sud,2h)=0
Is it because Sud=48 which is below 50 (the strike price of the call in question)? Therefore the call is useless? I thought that you would have to calculate the price at node (Sud, 2h) like any other binomial tree discounting the values of the call at Sudu (57.6-50=7.6) and Sudd (38.4-50=negative so we use 0) using p*?
Please let me know how they made this assumption and please let me know if you need any further clarification! I'd be happy to help you help me.
Thanks in advance.
Calculating C(Sud,2h)
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