Question
In: Finance
Buffelhead’s stock price is $220 and could halve or double in each six–month period (equivalent to...
Buffelhead’s stock price is $220 and could halve or double in each six–month period (equivalent to a standard deviation of 98%). Suppose that you own a one–year American put option on Buffelhead stock with an exercise price of $220. The interest rate is 20% a year.
(a) Calculate the value of the put.
(b) Now compare the value with that of an equivalent European put
option.
Solutions
jeff jeffy answered 5 months agoRelated Solutions
The current price of the stock of Bufflehead company is C$100. During each six-month period it...
The current price of the stock of Bufflehead company is C$100.
During each six-month period it will either rise by 10% or fall by
10%. The interest rate is 6% per annum compounded
semi-annually.
a. Calculate the value of a one-year European put option on
Bufflehead's stock with an exercise price of C$115.
b. Recalculate the value of the Bufflehead put option, assuming
that it is an American option.
The current price of a stock is $41. During each 6-month period, the price will either...
The current price of a stock is $41. During each 6-month period,
the price will either rise by 29% or fall by 22.5%. The annual
interest rate is 8.16%. Calculate the value of a one-year American
PUT option on the stock with an exercise price of $40.
A stock price is currently $36. During each three-month period for the next six months it is expected to increase by 9% or decrease by 8%.
Problem 3: Derivatives ValuationA stock price is currently $36. During each three-month period
for the next six months it is expected to increase by 9% or
decrease by 8%. The risk-free interest rate is 5%. Use a two-step
tree to calculate the value of a derivative that pays off
(max[(40-ST),0])2 where ST is the
stock price in six months.Use risk-neutral valuation.Verify whether both approaches lead to the same result.If the derivative is of American style (ST in the
payoff function...
A stock price is currently $100. Over each of the next two six-month periods it is...
A stock price is currently $100. Over each of the next two
six-month periods it is expected to go up by 10% or down by 10%.
The risk-free interest rate is 8% per annum with continuous
compounding. What is the value of a one-year European call option
with a strike price of $100 using a two-step Binomial tree? (Draw
the tree)
A stock price is currently $100. Over each of the next two six-month periods, it is...
A stock price is
currently $100. Over each of the next two six-month periods, it is
expected to go up by 10% or down by 10%. The risk-free interest
rate is 10% per year with semi-annual compounding.
Based on no
arbitrage principle and riskless portfolio we can construct along
the above binomial tree, briefly discuss how we can hedge risk if
we write a European put option with an exercise price of $101 and
1-year maturity.
A stock price is currently $100. Over each of the next two six-month periods it...
A stock price is currently $100. Over each of the next two
six-month periods it is expected to go up by 10% or down by 8%. The
risk-free interest rate is 8% per annuum with continuous
compounding. What is the value of a one-year European call option
with a strike price of $105?
A stock price is currently $200. Over each of the next two six-month periods it is...
A stock price is currently $200. Over each of the next two
six-month periods it is expected to go up by 10% or down by 10%.
The risk-free interest rate is 6% per annum with continuous
compounding. What is the value of a one-year European call option
with a strike price of $200?
A stock price is currently $200. Over each of the next two six-month periods it is...
A stock price is currently $200. Over each of the next two
six-month periods it is expected to go up by 10% or down by 10%.
The risk-free interest rate is 6% per annum with continuous
compounding. What is the value of a one-year European call option
with a strike price of $200?
A stock price is currently $30. During each two-month period for the next four months it...
A stock price is currently $30. During each two-month
period for the next four months it will increase by 8% or decrease
by 10%. The
risk-free interest rate is 4%. Use a two-step tree to calculate the
value of a derivative
that pays off [max(30-ST, 0)]2, where ST is the stock price in four
months. If the
derivative is American-style, should it be exercised early?
The price of a non-dividend paying stock is $15 and the price of a six-month European...
The price of a non-dividend paying stock is $15 and the price of
a six-month European call option on the stock with a strike price
of $23 is $2. The risk-free rate is 4% per annum. What is the price
of a six-month European put option with a strike price of $23?
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