A stock price is currently $100. Over each of the next two 3-month periods, it will go up by 10% or down by 10%. The risk-free interest rate is 6% per annum with semiannual compounding. A (a) What is the value of a 6-month European call option with a strike price of $100? Calculate this directly using a two-period binomial tree and the delta-hedging approach.

A stock price is currently $100. Over each of the next two 3-month periods, it will go up by 10% or down by 10%. The risk-free interest rate is 6% per annum with semiannual compounding. A (a) What is the value of a 6-month European call option with a strike price of $100? Calculate this directly using a two-period binomial tree and the delta-hedging approach.

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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A stock price is currently $30. It is known that at the end of one year, it will be either $36 and $24. The exercise price of a one-year European call option is $32. The risk-free interest rate is 5% per annum. a. Construct a binomial tree to show the payoff of the call option at the expiration date. b. Based on the binomial tree model, what is the value of the call option?
The stock price is currently $130. Over each of the next two 2-month periods, it is expected to go up by 3% or down by 4 %. The risk - free interest rate is 1.5% per annum with continuous compounding. What is the value of a 4-month European put option with a strike price of $120? Use a binomial tree model, and round the result to three decimal places. 1. $1.019 2. $2.602 3. $0.029 4. S0.0 5. $6.645
The stock price is currently $130. Over each of the next two 2-month periods, it is expected to go up by 3% or down by 4%. The risk - free interest rate is 1.5% per annum with continuous compounding. What is the value of a 4- month European put option with a strike price of $120? Use a binomial tree model, and round the result to three decimal places. 1. $1.019 2. $2.602 3. S 0.029 4. $0.0 5. $6.645
A stock price is currently $50. Over each of the next two three-month periods it is expected to go up by 10% with a probability of 50% or down by 5% with a probability of 50%. The risk-free interest rate is 4% per annum with continuous compounding. What is the value of a six-month European call option with a strike price of $50? Use binomial tree method to solve this problem
A stock price is currently $30. It is known that at the end of one year, it will be either $36 and $24. The exercise price of a one-year European call option is $32. The risk-free interest rate is 5% per annum. Construct a binomial tree to show the payoff of the call option at the expiration date.
A stock price is currently $60. Over each of the next two six-month periods, it is expected to go up by 6% or down by 6%. The risk-free interest rate is 5% per year with semi-annual compounding. Part I. Use the two-step binomial tree model to calculate the value of a one-year European put option with an exercise price of $61. Part II. Discuss how you can hedge risk when you initially write the put option? Part III. Assume six months have passed, discuss how you can hedge risk when you realize that the stock price is $63.6?
The market price of JS stock is currently $30. It is known that at the end of three months it will be either $33 or $27. The risk-free interest rate is 8% per annum with continuous compounding. (a) Use a one-step binomial tree to calculate the value of a three-month European put option on the JS stock with a strike price of $31? Use no-arbitrage arguments (you need to show how to set up the riskless portfolio). (b) Use the same one-step binomial tree and your results from (a) to determine the price of a three-month American put option on the JS stock with a strike price of $31
A stock price is currently $50. Over each of the next two three-month periods it is expected to go up by 6% or down by 5%. The risk-free rate is 5% per annum with continuous compounding. What is the value of a six-month European call option with a strike price of $51? (Round your answer to the 4 decimal places) Consider the setting of the previous problem but now find the value of a six-month European put option with a strike price of $51. (Round your answer to the 4 decimal places)
You are given the following information. S=50, X=50, simple annual risk-free interest rate is 5%, standard deviation of monthly stock returns is 10%. What is the value of a one-year European call option using the three-period Binomial model?
What is the price of a European CALL option that is expected to pay a dividend of $2 in three months with the following parameters? s0 = $40d = $2 in 3 monthsk = $42 r = 10%sigma = 20%T = 0.5 years (required precision 0.01 +/- 0.01)
Using Binomial Tree Model, Calculate the value of European Call option and European Put option from the given information. The current spot price of the Reliance stock is 1800, which is expected to rise to 2000 or fall to 1550 after a month. The annual continuously compounded risk-free interest rate is 10%. The strike price 1700.
A stock price is currently $100. Over each of the next two six-month periods it is expected to go up by 10% or down by 10%. The risk-free interest rate is 8% per annum with continuous compounding. What is the value of a one-year European call option with a strike price of $100? What is the value of a one-year European put option with a strike price of $100? Verify that the European call and European put prices satisfy put–call parity.

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