Question

Explain adjustments that have to be made when $r=q$ for (a) the valuation formulas for floating lookback call options in Section 26.11 and (b) the formulas for $M_1$ and $M_2$ in Section 26.13 .

   Explain adjustments that have to be made when $r=q$ for (a) the valuation formulas for floating lookback call options in Section 26.11 and (b) the formulas for $M_1$ and $M_2$ in Section 26.13 .

Options, Futures, and Other Derivatives

Options, Futures, and Other Derivatives

John C. Hull 10th Edition

Chapter 26, Problem 23

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11, the parameter $r$ represents the risk-free interest rate. When $r=q$, it means that the risk-free interest rate is equal to the dividend yield rate. This situation can occur when the underlying asset pays dividends or has a cost of carry. To adjust for this, Show more…

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Explain adjustments that have to be made when $r=q$ for (a) the valuation formulas for floating lookback call options in Section 26.11 and (b) the formulas for $M_1$ and $M_2$ in Section 26.13 .

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