 Solution

ID: past-exam-of-the-mathematics-course-of-the-university-of-cambridge/2006/ii/paper-1/28i/b/solution

Codex  0 Created 2026-09-24 Updated 2026-10-14

At the up node, both immediate exercise and continuation are zero. At the down node the exercise value is

864 - 576 = 288

, while the discounted continuation value is

R^{- 1} (480/3) = 120

. Exercise there is optimal. At time zero immediate exercise pays zero, so

V_{0} = R^{- 1} (\frac{1}{3} \cdot 288) = 72.

 New to topics? Read the docs here!