1. A nondividend-paying stock is currently priced at $76. 2. In one year, there will only be two possible values for the stock's price. 3. The up factor per period if the stock price increases is u = 1.4. 4. The down factor per period if the stock price decreases is d = 0.7. 5. The continuously compounded risk-free interest rate is 6%. A 1-year 75-strike European put option is priced using a one-period binomial tree. Calculate the number of shares of stock that must be purchased to replicate the put option.

1. A nondividend-paying stock is currently priced at $76. 2. In one year, there will only be two possible values for the stock's price. 3. The up factor per period if the stock price increases is u = 1.4. 4. The down factor per period if the stock price decreases is d = 0.7. 5. The continuously compounded risk-free interest rate is 6%. A 1-year 75-strike European put option is priced using a one-period binomial tree. Calculate the number of shares of stock that must be purchased to replicate the put option.

Essentials Of Investments

11th Edition

ISBN:9781260013924

Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.

Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.

Chapter1: Investments: Background And Issues

Section: Chapter Questions

Problem 1PS

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Suppose that a stock price is currently 68 dollars, and it is known that at the end of each of the next two six-month periods, the price will be either 19 percent higher or 19 percent lower than at the beginning of the period. Find the value of a European put option on the stock that expires a year from now, and has a strike price of 67 dollars. Assume that no arbitrage opportunities exist, and a risk-free interest rate of 7 percent. Answer = dollars.
Suppose that a stock price is currently 64 dollars, and it is known that at the end of each of the next two six- month periods, the price will be either 18 percent higher or 18 percent lower than at the beginning of the period. Find the value of a European put option on the stock that expires a year from now, and has a strike price of 58 dollars. Assume that no arbitrage opportunities exist, and a risk-free interest rate of 10 percent.
Suppose that Stock XYZ is currently trading at $50 and does not pay any dividends. Using a binomial tree with two periods, we would like to price a European call option with a strike of $50 and a maturity of six months. Assume that annual continuously compounded interest rate is 1% and the volatility of the stock is 30% per year. What is the value of q? 0.5565 0.4709 0.5000 0.3401 0.5000. You selected this answer.
The price of a European call that expires in six months and has a strike price of $30 is $2. The underlying stock price is $29, and a dividend of $0.50 is expected in two months and again in five months. Risk-free interest rates (all maturities) are 10% per annum with continuous compounding. What is the price of a European put option that expires in six months, and has a strike price of $30 and the same underlying asset?
Suppose that the price of a stock today is at $25. For a strike price of K = $24 a 3-month European call option on that stock is quoted with a price of $2, and a 3-month European put option on the same stock is quoted at $1.5 Assume that the risk-free rate is 10% 3. per annum. (a) Does the put-call parity hold?
Consider a 2-year European put with a strike price of $52 on a stock whose current stock price is $50. Suppose that there are two time steps, and in each time step the stock price either moves up by 30% or moves down by 30%. Also suppose that risk-free rate is 7% per annum with continuous compounding. What is the value of the European put option?
When the non-dividend paying stock price is $20, the strike price is $20, the risk-free rate is 6% per year with continuous compounding, the volatility is 30% and the time to maturity is 3 months which of the following is the price of a European call option on the stock? 19.7N(0.175)-20N (0.025) 19.7N(0.025)-20N (0.175) 20N(0.175)-19.7N(0.025) O 20N(0.025)-19.7N(0.175)
Assume only two states will exist one year from today when a call on Delta Transportation, Inc. stock expires. The price of Delta stock will be either $60 or $40 on that date. Today, Delta stock trades for $55. The strike price of the call is $50. The continuously compounded risk - free rate is 9%. a. What is the tracking portfolio (\Delta and b)? b. How much are you willing to pay for the call option?
Suppose that a stock price is currently 35 dollars, and it is known that four months from now, the price will be either 51 dollars or 29 dollars. Find the value of a European call option on the stock that expires four months from now, and has a strike price of 39 dollars. Assume that no arbitrage opportunities exist and a risk-free interest rate of 10 percent.Answer =dollars.
The share price of your favourite company is currently traded at a price of £60 and interest is compounded continuously at rate 3.7% per year. Assume that the share evolves according to a discrete time LogNormal process with time measured in years, drift µ = 0.15 and volatility o = 0.24. You decide to buy a European call option with a strike price of £63 and an expiration date of two years from now. What is the no-arbitrage price for this option? State your answer to the nearest pence. Do not enter the pound sign.
1. A stock that pays no dividends is worth So = 50 euros today. The risk-free interest rate with continuous compounding is 3% for the maturity T = 2 months. Assume that, in two months, the stock can take one of the two values Sou 53 euros or Sød = 48 euros. Calculate the price of a European put on the stock with maturity T and exercise price K= 51 euros. =
The share price of your favourite company is currently traded at a price of £60 and interest is compounded continuously at rate 3.7% per year. Assume that the share evolves according to a discrete time LogNormal process with time measured in years, drift μ= 0.15 and volatility o = 0.24. You decide to buy a European call option with a strike price of £63 and an expiration date of two years from now. What is the no- arbitrage price for this option? State your answer to the nearest pence. Do not enter the pound sign.

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