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#1
02-14-2012, 02:12 PM
 LifeIsAPoissonProcess Member SOA Join Date: Aug 2010 Studying for C Posts: 3,389
ASM 9th ed pg. 282

Example 13B asks to calculate an option based on 3 monthly stock prices using a binomial tree. The answer says that there are 8 possibilities over 3 months. I thought 3 monthly stock prices = 4 possibilities, since it only takes 2 months to gather 3 separate prices. I think the wording in the answer and the question are referencing two different time intervals, although independently, each of the phrasings is correct. Anyone have insight to the terminology of "3 monthly prices" vs. "prices over 3 months"?
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#2
02-14-2012, 02:14 PM
 Actuarialsuck Member Join Date: Sep 2007 Posts: 5,328

Quote:
 Originally Posted by LifeIsAPoissonProcess Example 13B asks to calculate an option based on 3 monthly stock prices using a binomial tree. The answer says that there are 8 possibilities over 3 months. I thought 3 monthly stock prices = 4 possibilities, since it only takes 2 months to gather 3 separate prices. I think the wording in the answer and the question are referencing two different time intervals, although independently, each of the phrasings is correct. Anyone have insight to the terminology of "3 monthly prices" vs. "prices over 3 months"?
Are you counting the initial node? You shouldn't be since that one is given (you don't need to calculate it).
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 Originally Posted by Buru Buru i'm not. i do not troll.
#3
02-14-2012, 02:21 PM
 LifeIsAPoissonProcess Member SOA Join Date: Aug 2010 Studying for C Posts: 3,389

Quote:
 Originally Posted by Actuarialsuck Are you counting the initial node? You shouldn't be since that one is given (you don't need to calculate it).
Yes I am counting the initial node. Why does my need to calculate the stock price have anything to do with how many prices we need? If I have 3 coins, and find out one is a penny, I don't suddenly have 2 coins...
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#4
02-14-2012, 02:27 PM
 Actuarialsuck Member Join Date: Sep 2007 Posts: 5,328

Quote:
 Originally Posted by LifeIsAPoissonProcess Yes I am counting the initial node. Why does my need to calculate the stock price have anything to do with how many prices we need? If I have 3 coins, and find out one is a penny, I don't suddenly have 2 coins...
Maybe it's convention but later when you get to Asian prices (or maybe this IS Asian options), you never look at $S_0$
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Quote:
 Originally Posted by Buru Buru i'm not. i do not troll.
#5
02-14-2012, 02:34 PM
 d45 Member SOA Join Date: Sep 2010 Location: Europe Studying for Life Favorite beer: Espresso Posts: 154

The option says to calculate based on 3 monthly stock prices not 4, even though that could be done also.
#6
02-14-2012, 02:41 PM
 LifeIsAPoissonProcess Member SOA Join Date: Aug 2010 Studying for C Posts: 3,389

Quote:
 Originally Posted by Actuarialsuck Maybe it's convention but later when you get to Asian prices (or maybe this IS Asian options), you never look at $S_0$
This is an asian option. I don't really understand where you are coming from by saying that we never look at S(0). You need S(0) to calculate the next node, otherwise u and d wouldn't help you. Without it, you just have your options in terms of the the original stock price instead of in dollars.
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#7
02-14-2012, 02:45 PM
 Actuarialsuck Member Join Date: Sep 2007 Posts: 5,328

Quote:
 Originally Posted by LifeIsAPoissonProcess This is an asian option. I don't really understand where you are coming from by saying that we never look at S(0). You need S(0) to calculate the next node, otherwise u and d wouldn't help you. Without it, you just have your options in terms of the the original stock price instead of in dollars.
What I am saying is that when they ask you to calculate averages, you do not include the starting price in your averages.
__________________
Quote:
 Originally Posted by Buru Buru i'm not. i do not troll.
#8
02-14-2012, 03:05 PM
 LifeIsAPoissonProcess Member SOA Join Date: Aug 2010 Studying for C Posts: 3,389

Quote:
 Originally Posted by Actuarialsuck What I am saying is that when they ask you to calculate averages, you do not include the starting price in your averages.
I agree with that, but there is more to an asian option than its average.
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