ABC's stock is trading at $63 per share. The stock price will either increase or decrease by $10 in the first month. If the price increases in the first month, it will go up by 20% or down by 10% in the second month. If the price decreases in the first month, it will go up by 40% or down by 20% in the second month. The monthly risk-free interest rate is 2% for the first month and 3% for the second month. a) Using the replicating portfolio approach, calculate the value of a 1-month ATM put option. b) Using the risk neutral probability approach, calculate the value of a 2-month ATM call option.
ABC's stock is trading at $63 per share. The stock price will either increase or decrease by $10 in the first month. If the price increases in the first month, it will go up by 20% or down by 10% in the second month. If the price decreases in the first month, it will go up by 40% or down by 20% in the second month. The monthly risk-free interest rate is 2% for the first month and 3% for the second month. a) Using the replicating portfolio approach, calculate the value of a 1-month ATM put option. b) Using the risk neutral probability approach, calculate the value of a 2-month ATM call 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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Question
ABC's stock is trading at $63 per share. The stock price will either increase or decrease by $10 in the first month. If the price increases in the first month, it will go up by 20% or down by 10% in the second month. If the price decreases in the first month, it will go up by 40% or down by 20% in the second month. The monthly risk-free interest rate is 2% for the first month and 3% for the second month.
a) Using the replicating portfolio approach, calculate the value of a 1-month ATM put option.
b) Using the risk neutral probability approach, calculate the value of a 2-month ATM call option.
Transcribed Image Text:ABC's stock is trading at $63 per share. The stock price will either increase or decrease by $10 in
the first month. If the price increases in the first month, it will go up by 20% or down by 10% in
the second month. If the price decreases in the first month, it will go up by 40% or down by
20% in the second month. The monthly risk-free interest rate is 2% for the first month and 3%
for the second month.
a) Using the replicating portfolio approach, calculate the value of a 1-month ATM put option.
b) Using the risk neutral probability approach, calculate the value of a 2-month ATM call
option.
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