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A stock is currently priced at $54.00. Every 3 months the price will go up by...

A stock is currently priced at $54.00. Every 3 months the price will go up by 14% or down by 15%. The risk free rate is 5.9% per annum with continuous compounding.

Consider a portfolio made of the following: a bond which pays $26.00 in 9 months; 3 European straddle options each with strike $56.00 expiring in 9 months.

Using the binomial tree model, compute the price of this portfolio.

Solutions

Expert Solution

Straddle is an option strategy in which investor buy simultaneously one call and one put with same expiry and strike price.

3 straddle means 3 call options and Put options bought.

To calculate Price of Portfolio, we need to calculated first price of Call, Put and Bond.

Price of Call option: using Binomial tree model.

Cell reference -

Price of Put option: using Binomial tree model

Cell reference -

Price of Bond: as Zero coupon bond.

Cell reference -

Thus,

jeff jeffy answered 2 days ago
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