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CMP Cp9 Exotic Options Excel Examples

T

TryingHardToPass

Member
Hi
I am trying to work through the examples on the CMP for Chapter 9 on Exotic Options, and I have the following questions to clarify:
  1. On pg 18, 2.1 Chooser Option, how is the "Forward price F" and "Forward price F(t_c)" calculated? How do they play into the calculations as the value of the chooser option can be calculated without using these values.
  2. I think the section on 2.3 Gap Options should refer to Binary Options?
  3. On the section on 2.4 Quantos, for the forward exchange rate, I reason it as follow:
    1. I have 1 USD, which I can invest at 3% rfr for USD 1.03 after 1 year
    2. Alternatively, I can convert to GBP and invest at 5% for 1USD * 0.7 GBP/USD * 1.05 = GBP 0.735 after 1 year
    3. The forward exchange rate GBP/USD = 0.735/1.03 = 0.7136 (which is just 0.7*1.05/1.03, as opposed to the value in the example which is 0.7*1.03/1.05). Intuitively, the GBP should depreciate to reflect the higher rate of return earned so that investing in USD and GBP both gives the same rate of return. However, I can't seem to find the fault in the above reasoning.
  4. Also on section 2.4, could I just confirm that when calculating q, the risk-neutral up probability, we only need to concern ourselves with the risk-free rate which the underlying is based in? i.e. in this case, 3%, so q = (e^0.01 - d)/(u-d)
Thank you in advance and sorry for the list of questions!
 
TryingHardToPass said:
Hi
I am trying to work through the examples on the CMP for Chapter 9 on Exotic Options, and I have the following questions to clarify:
  1. On pg 18, 2.1 Chooser Option, how is the "Forward price F" and "Forward price F(t_c)" calculated? How do they play into the calculations as the value of the chooser option can be calculated without using these values.
  2. I think the section on 2.3 Gap Options should refer to Binary Options?
  3. On the section on 2.4 Quantos, for the forward exchange rate, I reason it as follow:
    1. I have 1 USD, which I can invest at 3% rfr for USD 1.03 after 1 year
    2. Alternatively, I can convert to GBP and invest at 5% for 1USD * 0.7 GBP/USD * 1.05 = GBP 0.735 after 1 year
    3. The forward exchange rate GBP/USD = 0.735/1.03 = 0.7136 (which is just 0.7*1.05/1.03, as opposed to the value in the example which is 0.7*1.03/1.05). Intuitively, the GBP should depreciate to reflect the higher rate of return earned so that investing in USD and GBP both gives the same rate of return. However, I can't seem to find the fault in the above reasoning.
  4. Also on section 2.4, could I just confirm that when calculating q, the risk-neutral up probability, we only need to concern ourselves with the risk-free rate which the underlying is based in? i.e. in this case, 3%, so q = (e^0.01 - d)/(u-d)
Thank you in advance and sorry for the list of questions!
Click to expand...
Apologies please ignore Q1, I figured out that it's just S0exp([r-q]T) and can be used in the Black's model!
 
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