Question

In: Finance

Consider a stock currently trading at 25 that can go up or down by 15% per...

Consider a stock currently trading at 25 that can go up or down by 15% per period. The risk-free rate is 10%. Use one-period binomial model.

A. Find the value of the option today.

B. Construct a hedge by combining a position in stock with a position in the call. Calculate the hedge ratio and show that return on the hedge portfolio is the real risk free regardless of the outcome, assuming that the call trading at the price obtained in part c.

C. Determine the rate of return from a risk free hedge if the call is trading at 3.50 when the hedge is initiated.

Please show all work. Thank you.

Solutions

Expert Solution

Please give positive vote , let me know if you need any further information regaring the question

jeff jeffy answered 2 years ago
Next > < Previous

Related Solutions

Consider a stock currently trading at 25 that can go up or down by 15% per...
Consider a stock currently trading at 25 that can go up or down by 15% per period. The risk-free rate is 10%. Use one-period binomial model. A. Find the value of the option today. B. Construct a hedge by combining a position in stock with a position in the call. Calculate the hedge ratio and show that return on the hedge portfolio is the real risk free regardless of the outcome, assuming that the call trading at the price obtained...
Consider a stock currently trading at 25 that can go up or down by 15 percent...
Consider a stock currently trading at 25 that can go up or down by 15 percent per period. The risk-free rate is 10 percent. Use one-period binomial model. a. Determine the two possible stock prices for the next period. b. Determine the intrinsic values at expiration of a European call with an exercise price of 25. c. Find the value of the option today. d. Construct a hedge by combining a position in stock with a position in the call....
Consider a stock currently trading at 25 that can go up or down by 15 percent...
Consider a stock currently trading at 25 that can go up or down by 15 percent per period. The risk-free rate is 10 percent. Use one-period binomial model. A. Determine the two possible stock prices for the next period. B. Determine the intrinsic values at expiration of a European call with an exercise price of 25. C. Find the value of the option today. D. Construct a hedge by combining a position in stock with a position in the call....
the stock under consideration is currently trading at K25 it can either go up or down...
the stock under consideration is currently trading at K25 it can either go up or down by 15 percent in any given period. The risk-free rate is 10 percent. Using a two-period binomial model, A. Determine the six possible stock prices for the next period. B. Determine the intrinsic values at expiration of a European call with an exercise price of 25. C. Find the value of the option today.
Suppose the stock of Host Hotels​ & Resorts is currently trading for $ 15 per share....
Suppose the stock of Host Hotels​ & Resorts is currently trading for $ 15 per share. a. If Host issued a 20 % stock​ dividend, what will its new share price​ be? b. If Host does a 3​ : 2 stock​ split, what will its new share price​ be? c. If Host does a 1​ : 3 reverse​ split, what will its new share price​ be?
Consider a stock which is currently selling at $4.5. The stock price will either go up...
Consider a stock which is currently selling at $4.5. The stock price will either go up to $5 + x with probability 0.5 or go down to $5 − x with probability 0.5 one period later. The one-period riskless rate of interest is 5%. a) What are the market prices of at-the-money put options that expire at the end of the period when x is set equal to $0.5, $1, $1.5, $2, and $2.5, respectively? b) Plot the one-period put...
Consider a stock which is currently selling at $4.5. The stock price will either go up...
Consider a stock which is currently selling at $4.5. The stock price will either go up to $5 + x with probability 0.5 or go down to $5 − x with probability 0.5 one period later. The one-period riskless rate of interest is 5%. (a) What are the market prices of at-the-money call options that expire at the end of the period when x is set equal to $0.5, $1, $1.5, $2, and $2.5, respectively?
Devon Energy stock is currently trading at $15 per share. You expect the stock to increase...
Devon Energy stock is currently trading at $15 per share. You expect the stock to increase to $35 in the next 6 months. If you choose to speculate on your belief, which of the following positions will provide the greatest profit if you hold it for the entire 6 months A long 6-month futures contract trading at $15.15 A long put option expiring in 6 months with a strike price of 15 and a put premium of $1.15 A long...
Suppose a stock currently trades at a price of 150. The stock price can go up...
Suppose a stock currently trades at a price of 150. The stock price can go up 33% or down 15%.The risk free rate is 4.5% 1. use a one period binomial model to calculate the price of a put option with exercise price of 150. 2. Suppose the put price is currently 14, show how to execute an arbitrage transaxtion that will earn more than the risk free rate . use 10,000 put options. 3. Suppose the put price is...
A stock with current price of $30 can only go up or down by $2 each...
A stock with current price of $30 can only go up or down by $2 each month. The probability that the stock goes up in price is 60% each month. The continuously compounding interest rate is 3% p.a. Use a binomial tree with 2 time steps to price an American put option with a strike of $32. Compute the value by setting up delta-hedged portfolios along the way and working out the cost.
ADVERTISEMENT
Subjects
ADVERTISEMENT
Latest Questions
ADVERTISEMENT