Using the following three-step binomial tree to compute the price of an European call option with strike price $90 and T = 6 months. The initial price for the underlying stock is $80. r = 0.05 per annum. St = 2 months. u = 2. d = 31. 80 (180) 156.25 (100 84 40.96

Using the following three-step binomial tree to compute the price of an European call option with strike price $90 and T = 6 months. The initial price for the underlying stock is $80. r = 0.05 per annum. St = 2 months. u = 2. d = 31. 80 (180) 156.25 (100 84 40.96

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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Concept explainers

Exchange Rate Risk

It is the possibility that the value of a currency will fluctuate in the future. In the wake of globalization, business establishments have increasingly ventured into international markets. The volume of international trade has prospered excellently in the near past and is expected to be more affluent in the future. The use of exchange-traded derivative financial instruments has been multi-folded to provide for the requirements of various MNCs and offshore potential investors. Most banks and financial institutions have helped integrate the global economies. Our Government has introduced some bold and extreme measures to fulfil the purpose behind the fiscal, industrial, and monetary policies. The enactment of GST is a huge step towards streamlining the taxation system of the country. Owing to Covid-19, this aspect of corporate risk management has become critical.

Question

1. Using the following three-step binomial tree to compute the price of an European call
option with strike price $90 and T = 6 months. The initial price for the underlying stock
3. d =/.
0.05 per annum. St 2 months. u =
=
is $80. r
=
80
180
04
125
156.25
100
+
40.96
Figure 2.10: A binomial tree

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The following two-step binomial tree depicts the quarterly price path of an underlying share for an American call option. Each step represents a quarter of a year. The strike price of this option is $40 and the risk free rate is 5% pa. a) Calculate the payoff of the option at point (b). Give your answer in dollars and cents to the nearest cent. Payoff at point (b) = $ Binomial Share Prices a) b) c) d) e) f) $41.00 $43.87 $38.13 $46.94 $40.80 $35.46 a) b) Calculate the value of the option at point (b). Give your answer in dollars and cents to the nearest cent. Value of the option at point (b) = $ b) c) -d) e) f)
F1
What are the prices of a call option and a put option with the following characteristics? (Do not round intermediate calculations and round your answers to 2 decimal places, e.g., 32.16.) Stock price Exercise price Risk-free rate Maturity Standard deviation Call price Put price = $81 = $75 3.60% per year, compounded continuously = 5 months = 57% per year
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A stock price is currently 50 and after 6-months it can be either 60 or 42. The risk-free rate is 12% (continuous compounding). The no-arbitrage price of a 6-month european call option written on this stock with strike 50 is (a) 2.89 (b) 3.61 (c) 4.64 (d) 5.80 (e) 6.96
Suppose you buy GM put for P3, which matures in two months with a strike price of P60. GM is currently trading at P62.75. If the stock price of GM falls to P57 on the expiration date of the option, the rate of return of your put is at what amount?
Calculate the value of a call option for the following stock. Use the Black-Scholes formula. Time to expiration Standard deviation Exercise price Stock price Annual interest rate Dividend 6 months 50% per year $50 $50 3% 0 (Do not round intermediate calculations. Round your answer to 2 decimal places.) Value of a call option
Calculate the upper and lower bounds for the price of a 4-month European call option on a non-dividend-paying stock when the stock price is $28, the strike price is $25 and the risk-free rate is 8% p.a. compounded continuously. '0
1
The spot price of a non-dividend paying stock is recorded as ₺100 at the close of the day. You estimate that this price is equally likely to go up by 11.1% or go down by 10% every two months and observe that the continuously compounded annual risk-free rate is 20% per year across all maturities. Use a multistep binomial tree together with the risk-neutral valuation approach to compute the theoretical price of a European put option written on this stock with a strike price of ₺80 and exactly six months until expiration

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