Question
In: Finance
A 2-step binomial tree is used to value an American put option with strike 104, given...
A 2-step binomial tree is used to value an American put option with strike 104, given that the underlying price is currently 100. At each step the underlying price can move up by 20% or down by 20% and the risk-neutral probability of an up move is 0.55. There are no dividends paid on the underlying and the discretely compounded risk free interest rate over each time step is 2%. What is the value of the option in this model? A. 11.82 B. 12.33 C. 12.49 D. 12.78
Solutions
Expert Solution
C. 12.49
Please refer to below spreadsheet for calculation and answer. Cell reference also provided.
Cell reference -
Please note: American style option can be exercised before its expiration date thus, calculated both payoff and intrinsic value of option at each node and consider higher of payoff and intrinsic value at each node to compute value of american option at time 0 (i.e today).
jeff jeffy answered 5 months agoRelated Solutions
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Consider a two-step binomial tree for a European put option on a
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annually continuously compounded. The Strike Price (K) is 100. The
spot price is at 100. U= 1.2 and D= 0.8 for each quarterly period.
The payoff of this derivative is (ST/K). By this I mean that the
payoff is the price of the...
Use a 2 step binomial tree to value a new exotic derivative. Draw the tree and...
Use a 2 step binomial tree to value a new exotic derivative.
Draw the tree and label the stock prices and derivative values at
each node.
The option expires in 6 months. The interest rate is 10%
annually continuously compounded. The Strike Price (K) is 100.
The spot price is at 100. U= 1.2 and D= 0.8 for each quarterly
period. The payoff of this derivative is (ST/K). By this I mean
that the payoff is the price of the...
Given the following: Call Option: strike price = $100, costs $4 Put Option: strike price =...
Given the following:
Call Option: strike price = $100, costs $4
Put Option: strike price = $90, costs $6
How can a strangle be created from these 2 options? What are the
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Using a binomial tree, what is the price of a $40 strike 6-month put op- tion,...
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data: S = 37:90; r = 0:05; = 32:1%
(a) 3.52
(b) 3.66
(c) 3.84
(d) 3.91
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Put Option: Strike Price = $60, expiration costs $4
In excel, show the profit from a straddle for this. What range
of stock prices would lead to a loss for this?
Including a graph would be helpful.
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