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answer 1 question 800 1000 words for option analysis and valuations

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  1. A compound option is an option for which the underlying asset is another option (option on option). Therefore, there are two strike prices and two exercise dates. Let the strike price of the first and second strike prices X1 and X2 are $2 and $8, respectively, the time to maturity of first option T1 is 1 year and for the second option T2 equals 2 years. Consider both options as European Call options. Estimate the price of the compound option if the underlying asset of the second option is General Electric Co (GE) (with dividends). Use all relevant information for General Electric Co (GE) as in questions 1a.

using binomial trees with 20 time steps

800-1000 words

 
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