3. A stock S(0) 100 will go up to 105 or down to 95 in one time step (timeT). Suppose eT 1.025. What is the present value of a put option withstrike K 99 and expiry T?==

An option is a contract that gives the holder the right, but not the obligation, to buy (call…

Answered: A stock S(0) = 100 will go up to 105 or…

A stock S(0) = 100 will go up to 105 or down to 95 in one time step (time T). Suppose erT = 1.025. What is the present value of a put option with strike K = 99 and expiry T?

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

See similar textbooks

Related questions

Q: Suppose that a call option to buy a share for $200 costs $10. What is the delta of this option today…

A: Delta is a metric for calculating derivatives risk, which is the ratio of the change in the price of…

Q: Suppose you construct a strategy based on options on a stock that is currently selling for $100. The…

A: Our Strategy:- Buy one call option at strike price of $95. Sell two calls at strike price of $100.…

Q: Consider a put option on a stock that currently sells for £100, but may rise to £120 or fall to £80…

A: A put option needs to be valued using the principal of no arbitrage. This necessarily means that the…

Q: Suppose S = $98, K = $100, u = 1.08, d = 0.94 a one period put option with delta of -0.10000 should…

A: The predetermined price that is set when the buyer and seller of an option agree to a contract or…

Q: Find a portfolio with payoff at time T equal to if 0 ≤ S(T) ≤ 10, if 10 ≤S(T) ≤ 30, if 30 ≤S(T). VT…

A: To construct a portfolio with the desired payoff, we can break it down into three different regions…

Q: Assume that a $55 strike call has a 1.5% continuous dividend, r = 0.05 and the stock price is…

A: Vega:when there is sensitivity to change in the volatility of the underlying asset of an option's…

Q: Give typing answer with explanation and conclusion A call option has a strike price of $11, and a…

A: Value of call option will be calculated using formula : C = S × N(d1) - N(d2) × PV. (K)where, C…

Q: Suppose a zero dividend payment stock is selling for K48 per share.The standard deviation of the…

A: Stock price is K 48 per share Strike price is 50 per share Risk free rate is 8% Standard deviation…

Q: 8. Consider a pay later option on a stock with current price is $10, with volatility 10%, the risk…

A: The binomial option pricing model is used to determine the American stock options. This method is…

Q: Consider the following portfolio: Long 0 puts with strike price 98.0 Short 1 puts with strike price…

A: If the buyer exercises the option, the underlying asset must be sold when the call option is sold.…

Q: The value of an option is $5.64, its theta is 0.03. What will be the expected price of the option on…

A: The rate at which the value of an option declines with time is called as theta. It is written as a…

Q: A call option on a stock index is valued using a three- step binomial tree with an up move that…

A: Call option gives the opportunity to buy stock on expiration but there is no obligation to do that…

Q: Consider a 3-month European call option on a non-dividend-paying stock. The current stock price is…

A: The call option is an instrument that allows its holder to buy the underlying asset at a fixed…

Q: (a) Calculate u, d, and p for a two-step tree. (b) Value the option using a two-step tree.

A: Binomial Option Pricing is one of the methods to evaluation the option price. In this method option…

Q: Let S = $60, K = $60, r = 8%, o = 30%, 8 = 0, T = 1.5, and n = 3. Construct the binomial tree for…

Q: Consider the following information on a particular stock: Stock price = $89 Exercise price = $85…

A: We have to use the blackscholes model of calculating option prices and other values. I will be…

Q: Suppose that a call option with a strike price of $48 expires in one year and has a current market…

A: According to put call parity theory there is certain relationship between the Put , call and stock…

Q: In each of the following questions, you are asked to compare two options with parameters as given.…

A: Step 1:An option is a derivative contract that gives the holder only the right and not any…

Q: in a one-period binomial model, assume that the current stock price is $100 and that it will rise by…

A: Value or price of a call option A call option provides its holder the right to buy stock at the…

Q: 1. Consider a 4 month European put on a stock with no dividend the follow- ing parameters: S(0) =…

A: Vega:The vega of an option represents the sensitivity of the option's price to variations in…

Q: Consider a synthetic forward option, with the strike price, K = $19, while the initial stock price =…

A: The synthetic forward contract is used to create an artificial forward position by buying/selling a…

Q: Consider a put option on a stock that currently sells for £100, but may rise to £120 or fall to £80…

A: A risk-neutral valuation states that the value of the stock would be equal to the value of the stock…

Q: The value of an option is $3.16, its vega is 0.7. What will be the expected price of the option if…

A: Vega of an option will measure the impact of changes in volatility on the price of an option.

Q: This is a two state option pricing question. The riskfree rate is zero. Current stock price is 95.…

A: The objective of this question is to find the strike price of a put option given the current stock…

Q: A stock with a current price of $20 will either move up to $22 or down to $18 over the next period.…

A: Value of an option is the price at which the option contract is trading in the derivative market. It…

Q: Suppose that you purchased a call option on the S&P 100 Index. The option has an exercise price of…

A: A call option is a contract which gives the buyer right to buy a certain quantity of an underlying…

Q: Suppose you have the following information concerning a particular options. Stock price, S = RM 21…

A: “Hi There, thanks for posting the question. But as per Q&A guidelines, we must answer the first…

Q: Assume that the current price of a stock is S0 = 100. An investor holds long one European put option…

A: An investor has bought put option and investor has sold call option. So, overall position of the…

Q: Suppose you want to price an American style put option for a stock being traded on the Kuispad Stock…

A: An American put option is a financial contract that gives the holder the right, but not the…

Q: Let C be the price of a call option that enables its holder to buy one share of a stock at an…

A: Given that, K is the exercise price, S is stock price at time 0.

Q: The value of an option is $6.24, its delta is 0.5, and the price for the underlying stock is $82.…

A: Delta of an Option helps in determining the change in value of an option due to change in price of…

Q: Assume the three-period binomial model (t = 0, 1, 2, 3) where S0 = 4, u = 2, d = 1/2 and r = 1/4.…

A: A method for valuing options was created in 1979 and is called the binomial option pricing model. 1…

Q: = A stock model has the parameters u = 1.6, d 0.4, So 18. A European call option, expiring at t = 3,…

A: U= 1.6 d=0.4 Stock price is 18 Exercise price , K is 21 Interest rate id 5% time to expiry is 3…

Q: nsider two put options on different stocks. The table below reports the relevant information for…

A: Put option is derivative product that derives value from underlying assets and gives the option the…

Q: Let us consider a covered call strategy. Suppose the call premium is 7, with the exercise price of…

A: The conceptual formula used:

Q: suppose that you have a call option that is at 1.30. it has a Delta of .35 a Gamma of .06 a Theta of…

A: These terms collectively known as "Greeks" and they provide a way to measure the sensitivity of an…

Q: Suppose that you have a call option that is at 1.30. it has a Delta of .35 a Gamma of .06 a Theta of…

A: These terms collectively known as "Greeks" and they provide a way to measure the sensitivity of an…

Q: Suppose you want to price an American style put option for a stock being traded on the Dryfontein…

A: Stock Option - The buyer's right under a contract between two parties for the purchase or sale of a…

Q: ercise price of

A: In such a strategy, you pay money for both call and put option= Given strike price for call X1 =…

Q: 4. Consider an exchange option. Suppose the initial prices (time 0) of the two s - S2 = 100 and a, =…

A: Price of exchange option refers to the value of shares at the time of expiry or when the…

Q: 3. Consider a one-period binomial model with h = 1, S = 100, r = 0.08, u = 1.5, d = 0.8 and 80.…

A: Options are priced using a relatively straightforward formula called the binomial option pricing…

Q: A power option pays off [max(S₁ – X),0]² at time T where ST is the stock price at time T and X is…

A: To calculate the risk-neutral probability, we can use the fact that the price of the power option is…

Question

3. A stock S(0) 100 will go up to 105 or down to 95 in one time step (time
T). Suppose eT 1.025. What is the present value of a put option with
strike K 99 and expiry T?
=
=

Expert Solution

This question has been solved!

Explore an expertly crafted, step-by-step solution for a thorough understanding of key concepts.

SEE SOLUTION Check out a sample Q&A here

Step 1: Conceptual introduction to Options:

VIEW

Step 2: Key information that is required from question:

VIEW

Step 3: Formula to calculate the present value of put option;

VIEW

Step 4: Calculate the volatility (σ) as follows:

VIEW

Step 5: Calculate d1 and d2 as follows;

VIEW

Step 6: Calculate N(−d1) and N(−d2) as follows;

VIEW

Step 7: Calculate the present value of the put option (P) as follows:

VIEW

Solution

VIEW

Step by step

Solved in 8 steps with 8 images

SEE SOLUTION Check out a sample Q&A here

Knowledge Booster

Learn more about

Need a deep-dive on the concept behind this application? Look no further. Learn more about this topic, finance and related others by exploring similar questions and additional content below.

Similar questions

In follow an Ito process with >0, a stock is worth $80 today, if the price of an option that pays the holder $2 exactly the first time the stock price reaches $200, what is the price of an option? Show all calculation.
D3(
You buy a share of stock, write a 1-year call option with X = $55, and buy a 1-year put option with X = $55. Your net outlay to establish the entire portfolio is $54. The stock pays no dividends. a. What is the payoff of your portfolio? Payoff b. What must be the risk-free interest rate? (Round your answer to 2 decimal places.) Risk-free rate %
K1.
D4) Consider a two-step binomial tree. What is the delta of the put option if: the futures price is S = 1682.00, the risk-free rate is r = 2.90%, the strike price is K = 1757.00, the maturity is T = 12 months and the tree parameters are u = 1.1357 and d = 0.8620? (keep 4 decimals in your calculations).
Let S = $100, K = $95, \sigma = 30%, r = 8%, T = 1, and \delta = 0. For simplicity, let u = 1.3, d = 0.8 and n = 2 (that is, 2 periods). When constructing the binomial tree for the European call option, what is A (Stock Share Purchased in the replicating portfolio) at the first node (Time 0)? Question 11 options: 0.1789 0.3886 1.0000 0.2550 0.6912
am. 116.
Consider a stock worth K12.50 that can go up or down by 15% per period. Assume aperiod process of one. The risk-free rate is 10%. Find the value of the call optiontoday, with the strike price of K11.50.
b) Suppose you are given the following information: Current market price of a share= R200 000 Option’s exercise price = R300 000 Time until the option expires= 5 yrs Risk free rate =4% Standard deviation of the returns on the share= 0.35 Required: i. Calculate d1 and d2 ii. Suppose N(d1) =0.7517 and N(d2) =0.4602; calculate the price of the call option on the share
QUESTION 2. Consider a stock valued So at time t = 0, and taking only two possible values S1 = S, or Si = S1 at time t = 1, with S, < I1. a) Compute the initial portfolio allocation (a, 3) of a portfolio made of a units of stock and $B in cash, hedging the call option with strike price K e [S,,3¡] and claim payoff Si – K if Si = 3ı C = (Si – K)* $0 if S = S1, at time t = 1. b) Show that the risky asset allocation a satisfies the condition a € [0, 1]. c) Compute the Superhedging Risk Measure SRMc' of the claim C = (S1 – K)+.
Consider a call option on one share of BP with a strike price of $70 and exercise time 1 quarter (3 months). Suppose the current stock price for BP is S(0) = $65 per share. Suppose further that A(0) = $100, A(1) = $102 and two possible prices for S(1) are S $74 with probability 0.5, S(1) = $66 with probability 0.5. Evaluate the expected returns E(Ks) and E(Kc) for the stock and the option.
Please correct answer and step by step solution

SEE MORE QUESTIONS

Recommended textbooks for you

Essentials Of Investments

Finance

ISBN:

9781260013924

Author:

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

Publisher:

Mcgraw-hill Education,

FUNDAMENTALS OF CORPORATE FINANCE

Finance

ISBN:

9781260013962

Author:

BREALEY

Publisher:

RENT MCG

Financial Management: Theory & Practice

Finance

ISBN:

9781337909730

Author:

Brigham

Publisher:

Cengage

Foundations Of Finance

Finance

ISBN:

9780134897264

Author:

KEOWN, Arthur J., Martin, John D., PETTY, J. William

Publisher:

Pearson,

Fundamentals of Financial Management (MindTap Cou…

Finance

ISBN:

9781337395250

Author:

Eugene F. Brigham, Joel F. Houston

Publisher:

Cengage Learning

Corporate Finance (The Mcgraw-hill/Irwin Series i…

Finance

ISBN:

9780077861759

Author:

Stephen A. Ross Franco Modigliani Professor of Financial Economics Professor, Randolph W Westerfield Robert R. Dockson Deans Chair in Bus. Admin., Jeffrey Jaffe, Bradford D Jordan Professor

Publisher:

McGraw-Hill Education

Essentials Of Investments

Finance

ISBN:

9781260013924

Author:

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

Publisher:

Mcgraw-hill Education,

FUNDAMENTALS OF CORPORATE FINANCE

Finance

ISBN:

9781260013962

Author:

BREALEY

Publisher:

RENT MCG

Financial Management: Theory & Practice

Finance

ISBN:

9781337909730

Author:

Brigham

Publisher:

Cengage

Foundations Of Finance

Finance

ISBN:

9780134897264

Author:

KEOWN, Arthur J., Martin, John D., PETTY, J. William

Publisher:

Pearson,

Fundamentals of Financial Management (MindTap Cou…

Finance

ISBN:

9781337395250

Author:

Eugene F. Brigham, Joel F. Houston

Publisher:

Cengage Learning

Corporate Finance (The Mcgraw-hill/Irwin Series i…

Finance

ISBN:

9780077861759

Author:

Stephen A. Ross Franco Modigliani Professor of Financial Economics Professor, Randolph W Westerfield Robert R. Dockson Deans Chair in Bus. Admin., Jeffrey Jaffe, Bradford D Jordan Professor

Publisher:

McGraw-Hill Education

SEE MORE TEXTBOOKS