21-370 Discrete-Time Finance
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# Assignments: Week #3

• Monday: Section 1.3.
• Wednesday: Section 2.1.
• Friday: Section 2.2 and 2.3.

## Exercises:

• Wednesday:
1. Problem 1.4
2. Problem 1.7
3. Problem 1.9
4. Consider the three-period binomial model in Example 1.2.1, and take the one-period interest rate to be r=1/4 in each period. Define Y3=S0+S1+S2+S3. Let V denote an "Asian call option" with strike price K=4, which at t=3 pays (Y3/4-4)+. This is like a European call option, but the payment is based on the average price, rather than the final price.
Use the "backward induction" of formula (1.2.16) to compute the price of this option at t=0. You may have to perform more calculations than you might expect since, for example, you can not expect that V2(HT)=V2(TH).

Homework assignments may be turned in before or after class on the due day, or may be placed in your TA's mailbox before 3:20pm on that day. The TA's mailboxes are in the Math Department office, WEH 6113.