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 6 months agoRelated Solutions
Use a 2-step binomial tree to price an american style put option when the current stock...
Use a 2-step binomial tree to price an american style put option
when the current stock price is $50 and the stock price will move
up or down by 20 percent at each time(that is, the ending stock
price are $72,$48, and $32). The strike price on the option is $52
and the risk-free interest rate is 5 percent per step. Please
report your answer to two decimal places.
Calculate three step Binomial tree call option price please. Stock price = 124.2862, Strike price =...
Calculate three step Binomial tree call option price please.
Stock price = 124.2862, Strike price = 120, Volatility = 20%,
Interest rate= 0.15%, Days to expiration = 247 days / 365 days
Thank you so much
Consider a two-step binomial tree for a European put option on a non-dividend paying stock “XY”....
Consider a two-step binomial tree for a European put option on a
non-dividend paying stock “XY”. The current price of stock “XY” is
$60. Over each of the next two 6-month periods the stock price is
expected to go up by 10% or down by 10%. The risk-free rate of
interest is 8% per annum with continuous compounding. The European
put option will expire in 1 year and has an exercise price of
$55.
a) Calculate the probabilities that 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...
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
profit patterns from this? Show using excel.
In the Binomial Option Pricing Model, compare the price of an American Put and a European...
In the Binomial Option Pricing Model, compare the price of an
American Put and a European put price using the same 5 step tree
with 3 months to maturity and a sigma of 23%. Let the starting
futures price be 72, the strike be 75 and let r = 5%.
A call option with a strike price of $50 costs $2. A put option with a...
A call option with a strike price of $50 costs $2. A put option
with a strike price of $45 costs $3. Explain how a strangle can be
created from these two options. Construct a table that shows the
payoff and profits of the strangle.
Using a binomial tree, what is the price of a $40 strike 6-month put op- tion,...
Using a binomial tree, what is the price of a $40 strike 6-month
put op-
tion, using 3-month intervals as the time period? Assume the
following
data: S = 37:90; r = 0:05; = 32:1%
(a) 3.52
(b) 3.66
(c) 3.84
(d) 3.91
Given the following: Call Option: Strike Price = $60, expiration costs $6 Put Option: Strike Price...
Given the following:
Call Option: Strike Price = $60, expiration costs $6
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.
ADVERTISEMENT
ADVERTISEMENT
Latest Questions
- A labor market has 50,000 people in the labor force. Each month, a fraction p of...
- A road with a radius of 72 m is banked so that a car can navigate...
- 1) If you had not dried the solid, would the calculated percent yield have been higher,...
- Two structures of alanine can be drawn that have a net charge of zero, but the...
- Co(II) was used as an internal standard to analyze a sample of Ti(IV) with atomic absorption...
- Matlab Programming Write an M-file to read a real-valued vector of any length from the keyboard...
- TASK back to top In the contemporary management environment, mergers and acquisitions are hot topics; particularly...
ADVERTISEMENT