Essentials Of Investments
11th Edition
ISBN: 9781260013924
Author: Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher: Mcgraw-hill Education,
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A stock index is currently 1,500. Its volatility is 18%. The risk-free rate is 4% per annum (continuously compounded) for all maturities and the dividend yield on the index is 2.5%. Calculate values for u, d, and p when a six-month time step is used. What is the value a 12-month American put option with a strike price of 1,480 given by a two-step binomial tree.
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- A stock price is currently $51. It is assumed that at the end of six months it will be either $30 or $74. The risk-free interest rate is 1.3% per annum with continuous compounding. The stock doesn't pay dividends. One-step binomial tree is used to value options. What is the value of a six-month European call option with a strike price of $51? Round your final result to the nearest cents and input one number only, without units or percentage sign [%], using the dot [.] to separate decimals. Your Answer: Answerarrow_forwardYou Consider a stock with a price of $50 that is expected to increase by 6% or decrease by 8% each month over the next two months. Having a risk-free rate at 3% per year with continuous compounding, calculate the value of a two-month European put option with a strike price of $55. Repeat your calculations for a two-month American put option with a strike price of $55. Show clearly all your calculations and results with the use of the relevant equations and graphs. Discuss your investment decision in each case separately.arrow_forwardConsider 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.arrow_forward
- am. 66.arrow_forwardConsider a two - period binomial model, where each period is 6 months. Assume the stock price is $75.00, \sigma 0.35, and r = 0.05. An American call option with a strike price of $80 would be exercised early at what dividend yield? () (A) 5.0% (B) 7.0 % (C) 9.0% (D) Never exercise earlyarrow_forwardUse the binomial tree analysis to value a 6-month American put option with a $65 strike price on Crookshanks Corporation. The shares are currently trading for $60. The annualized continuously compounded risk-free rate is 3%. The volatility of the stock is 57%. You will use the Cox Ross Rubenstein method for computing the binomial tree, and use a time step of 2 months.arrow_forward
- 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 $31arrow_forwardConsider a two-period binomial model in which a non-dividend-paying stock currently trades at £35. Over each of the next two six-month periods, the share price is expected to go up by 12% or down by 9%. The risk-free interest rate is 6% per annum with continuous compounding. Calculate the value of a one-year European put option with a strike price of £36, using a two-period binomial tree method.arrow_forwardA stock has a current price of 50. The continuously compounded risk - free interest rate is 8%. The stock is going to pay a dividend of 0.5 one month from now and another dividend of 1 five months from now. Suppose that the market prepaid forward price of a prepaid forward contract that delivers one share after 6 months is 49. Construct an arbitrage portfolio and give the arbitrage profit.arrow_forward
- The current price of a stock is $20. In 1 year, the price will be either $28 or $15. The annual risk-free rate is 7%. The data has been collected in the Microsoft Excel Online file below. Open the spreadsheet and perform the required analysis to answer the question below. Find the price of a call option on the stock that has a strike price is of $25 and that expires in 1 year. (Hint: Use daily compounding.) Assume 365-day year. Do not round intermediate calculations. Round your answer to the nearest cent.arrow_forwardA stock index is currently 1,500. Its volatility is 18%. The risk-free rate is 4% per annum (continuously compounded) for all maturities and the dividend yield on the index is 2.5%. Calculate values for u, d, and p when a six-month time step is used. What is the value a 12-month American put option with a strike price of 1,480 given by a two-step binomial tree.arrow_forwardA stock is currently trading at $54 and we assume a three-period binomial tree model where each period the stock can either increase by 20%, or fall by 18%. Each step in the tree is 3 months. The interest rate is 1.1% per year (continuous compounding). In this model, what is the risk-neutral probability that the stock price will go up twice and drop once over the three periods? [Provide your answer as a percentage rounded to two decimals, i.e. 40.25 for 0.4025=40.25%]arrow_forward
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