%   Copyright (c) 2001-2009 by Ales Cerny

%************************************************************************%
% chapter6sect3.m - supplementary program to                            %
% Ales Cerny (2009) Mathematical Techniques in Finance (2nd ed.)         % 
% Princeton University Press http://press.princeton.edu/titles/9079.html %
%************************************************************************%
    
% This code is provided 'as-is', without any express or implied warranty.  
% 
% Permission is granted to anyone to use this code for any purpose, 
% subject to the following restrictions:
% 
% 1. The origin of this code must not be misrepresented; you must not
%    claim that you wrote the original code.
% 2. Modified code versions must be plainly marked as such, and must not 
%    be misrepresented as being the original code.
% 3. This notice may not be removed from any source distribution.

% NOTICE TO STUDENTS: To avoid accusations of plagiarism, if you use this 
% code or its modifications in assessed work you should prepend it with a 
% note stating: 
%   "This is the original/modified version of the code chapter6sect3.m by 
%    Ales Cerny (2009), Mathematical Techniques in Finance (2nd ed.),  
%    Princeton University Press. The original version is available from 
%    http://www.martingales.info/mtfweb2".
% A similar acknowledgement should appear prominently inside your written 
% report.


%  This program implements binomial option pricing model. The log returns
%  are calibrated to give Poisson jump process in the limit.                   

clear;                    % clear the workspace
clc;                      % clear screem          

%***************************%
%      trading time         %
%       parameters          %
%***************************%
Minute = 1;
Hour = 60;
HoursInDay  =  8;
DaysInWeek = 5;
DaysInMonth = 21;
Day  = HoursInDay*Hour;
Week = DaysInWeek*Day;
Month = DaysInMonth*Day;
Year = 12*Month;

%***************************%
%     Hedging Parameters    %
%***************************%
T = 3*Month;                                               % Time to maturity    
RehedgeInterval = 60 * Minute;                             % Trading period      
S0 = 5100;                                                 % Initial stock price 
strike = 5355;

%***************************%
%    Transformation of      %
%       log returns         %
%***************************%
UnitTime = Month;
R1safe = 1.0033;                            % monthly safe return                
R1 = [1.053 0.965];                         % monthly return                     
PDistr = [0.5 0.5];                         % prob. density of monthly  returns  
lnR1 = log(R1);                             % monthly log return                 
mu1 = lnR1 * PDistr';                       % expected monthly log return     
sig1= sqrt(((lnR1-mu1).^2)*PDistr');        % volatility of monthly log return

dt = RehedgeInterval/UnitTime;

lambda=1.0;
dlnS=sig1/sqrt(lambda);
mutil=mu1+sqrt(lambda)*sig1;

lnRdt=mutil*dt-[0 dlnS];                  % log return over rehedging interval %
Rdt=exp(lnRdt);
Rdtsafe=R1safe^dt; 

%************************%
%      Risk-neutral      %
%      probabilities     %
%************************%
QDistr=[Rdtsafe-Rdt(2) Rdt(1)-Rdtsafe]./(Rdt(1)-Rdt(2));

%************************%
%   grid indexation      %
%************************%
Tidx=ceil(T/RehedgeInterval)+1;           % Number of trading dates            
dlnS=lnRdt(1)-lnRdt(2);                   % increment on log price grid        
highlnRdt=lnRdt(1);                       % the highest return over one period 

% there are tt live cells at time tt, highest stock price at the top         
% log price at cell  1 at time tt is ln(S0)+(tt-1)*highlnRdt
% log price at cell ii at time tt is ln(S0)+(tt-1)*highlnRdt-(ii-1)*dlnS

%************************%
%      option payoff     %
%************************%
S_T = log(S0)+(Tidx-1)*highlnRdt-(0:(Tidx-1))*dlnS;  % log price at maturity        
S_T = exp(S_T');                                     % stock price at maturity     
C = max([(S_T-strike)';zeros(1,length(S_T))]);       % option payoff at maturity    

%************************%
%       main loop        %
%************************%
tic;       		                                     % start of computation        
for tt= Tidx-1:-1:1
    Cnext = C;					                     % option value in next period 
    for ii = 1:1:tt
        C(ii)=(QDistr*Cnext(ii:ii+1)')/Rdtsafe;      % risk-neutral pricing        
    end
end
elapsedtime = toc;

disp('____________________________________________________');
disp(' '); 
disp(sprintf(' no-arbitrage option price at t=0      %12.4f', C(1,1)));
disp(' '); 
disp(sprintf(' option delta at t=0                   %12.3f',(Cnext(1)-Cnext(2))/S0/(Rdt(1)-Rdt(2))));
disp(' ');
disp(sprintf(' number of trading dates               %12.0f', Tidx));
disp(' ');
disp(sprintf(' required time in seconds              %12.2f', elapsedtime));
disp( '____________________________________________________');
disp(' ');