A binary call option pays $1 at expiry if the value of the underlying asset is...

A binary call option pays $1 at expiry if the value of the underlying asset is greater than the strike price, and $0 otherwise. The current interest rate is 3% pa.

(a) Calculate the return R over one month.

(b) Calculate all state prices at expiry for a ten-step binomial model where each time step is one month and the underlying asset is S=20, K=19, u=1.090, d=0.9173. That is, calculate all λ(10, j) for j = 0, 1, . . . , 10 .

Solutions

Expert Solution

Return over month for example for first month = (21.8-20)/20= 9%

b) Ten Step Binomial model lattice

										47.34727
									43.43787
								39.85125		39.84555
							36.56078		36.55555
						33.542		33.53721		33.53241
					30.77248		30.76808		30.76368
				28.23163		28.2276		28.22356		28.21952
			25.90058		25.89688		25.89317		25.88947
		23.762		23.7586		23.7552		23.75181		23.74841
	21.8		21.79688		21.79377		21.79065		21.78753
20		19.99714		19.99428		19.99142		19.98856		19.9857
	18.346		18.34338		18.34075		18.33813		18.33551
		16.82879		16.82638		16.82397		16.82157		16.81916
			15.43705		15.43484		15.43263		15.43042
				14.1604		14.15838		14.15635		14.15433
					12.98934		12.98748		12.98562
						11.91512		11.91341		11.91171
							10.92974		10.92818
								10.02585		10.02441
									9.196711
										8.436143
T = 0	T = 1	T = 2	T =3	T = 4	T = 5	T = 6	T = 7	T = 8	T = 9	T = 10

jeff jeffy answered 1 year ago

Next > < Previous

Related Solutions

A writer of a call option will want the value of the underlying asset to ________,...

A writer of a call option will want the value of the underlying asset to ________, and a buyer of a put option will want the value of the underlying asset to ________. A. decrease; decrease B. decrease; increase C. increase; increase D. increase; decrease

A call has a strike of $21. At expiry, the underlying asset of this call is expected to be either $34 or $18

A call has a strike of $21. At expiry, the underlying asset of this call is expected to be either $34 or $18. Use the one-step binomial pricing model to calculate the premium of this call when the return is 1.04 and the upstate risk-neutral probability is 0.43..

What is the value of the option? If a binary option pays off R150 if a...

What is the value of the option? If a binary option pays off R150 if a stock price is greater than R40 in three months. The current stock price is R35 and its vootalitu is 35%.The risk free rate is 4 % and the expected return of the stock is 10%. Secondly what is the Real - world probability that the payoff will be received?

There are two call options for the same underlying asset and same maturity. One call option...

There are two call options for the same underlying asset and same maturity. One call option C1 has exercise price of $120 and the other call option C2 has exercise price of $150. Also, one call sells for $8 and the other sells for $10. Select the prices of C1 and C2 from the given two values. Explain the reason/s for your price selection reflecting on the payoff and profit diagrams of the call options.

Derive a formula for the volga of a European call option on a no-dividend underlying asset...

Derive a formula for the volga of a European call option on a no-dividend underlying asset in the Black-Scholes model.

The price of a one-year at the money call option is 7.07. The underlying asset is...

The price of a one-year at the money call option is 7.07. The underlying asset is a stock that pays dividends at a rate of 4%. The stock’s volatility is 30% and the current risk-free interest rate is 10%. The call’s Delta is equal to .611831. Determine the current price of the stock.

You long a call option with a strike price of K. The underlying asset price on...

You long a call option with a strike price of K. The underlying asset price on expiration date is S. What is your payoff? Group of answer choices S - K if S > K, but zero otherwise. K - S if K > S, but zero otherwise. 0 S - K You short a call option with a strike price of K. The underlying asset price on expiration date is S. What is your payoff? Group of answer choices...

You bought a call option with a strike price of $60. The underlying asset is trading...

You bought a call option with a strike price of $60. The underlying asset is trading for $53 and you paid a premium of $14. What is the most you could lose form this strategy?

At expiry, a holder of a call option with an exercise price of $32 (purchased for...

At expiry, a holder of a call option with an exercise price of $32 (purchased for a premium of $0.85) over Wesfarmers shares (now trading at $33.65) will: Select one: not exercise with a loss of $1.65 per share exercise with a profit of $1.65 per share exercise with a profit of $0.80 per share not exercise with a loss of $0.85 per share exercise with a profit of $0.85 per share

An at-the-money call option with expiry 100 trading days later (for calculations consider that there are...

An at-the-money call option with expiry 100 trading days later (for calculations consider that there are 250 trading days per year) is written on a stock XYZ. The volatility of the stock is 26% and the stock pays no dividends during the life of the option. The risk free rate is 5%. Can you find the delta of the option? Suppose that you own 5,000 shares of the stock XYZ, how can you use the available call options to make...

Subjects