Question

In: Finance

A stock index is currently 1,000. Its volatility is 20%. The risk-free rate is 5% per...

A stock index is currently 1,000. Its volatility is 20%. The risk-free rate is 5% per annum

(continuously compounded) for all maturities and the dividend yield on the index is

3%. Calculate values for u, d, and p when a six-month time step is used. What is the

value a 12-month American put option with a strike price of 980 given by a two-step

binomial tree.

Solutions

Expert Solution

ANSWER IN THE IMAGE ((YELLOW HIGHLIGHTED). FEEL FREE TO ASK ANY DOUBTS. THUMBS UP PLEASE. THUMBS UP PLEASE.

Standard deviation 20.00%
Time of each period (months) 6
u= e^(Standard deviation)*( Time each period/12)0.5
u= 1.1519
d=1/u= 0.8681

jeff jeffy answered 1 year ago
Next > < Previous

Related Solutions

A stock index is currently 1,500. Its volatility is 18%. The risk-free rate is 4% per...
A stock index is currently 1,500. Its volatility is 18%. The risk-free rate is 4% per annum for all maturities and the dividend yield on the index is 2.5% (both continuously compounded). Calculate values for u, d, and p when a 6-month time step is used. What is value of a 12-month European put option with a strike price of 1,480 given by a two-step binomial tree?
A stock index currently stands at 300 and has a volatility of 20%. The risk-free interest...
A stock index currently stands at 300 and has a volatility of 20%. The risk-free interest rate is 8% and the dividend yield on the index is 3%. Use a three-step binomial tree to evaluate a six-month put option on the index with a strike price of 300 if it is (a) European and (b) American?
A stock price is currently AUD 70; the risk-free rate is 5% and the volatility is...
A stock price is currently AUD 70; the risk-free rate is 5% and the volatility is 30%. What is the value of a two-year American put option with a strike price of AUD 72
A stock index is currently 990, the risk-free rate is 5%, and the dividend yield on...
A stock index is currently 990, the risk-free rate is 5%, and the dividend yield on the index is 2%. (a) Use a three-step tree to value an 18-month American put option with a strike price of 1,000 when the volatility is 20% per annum. (b) How much does the option holder gain by being able to exercise early? When is the gain made? (c) What position in the stock is initially necessary to hedge the risk of the put...
An index currently stands at 736 and has a volatility of 27% per annum. The risk-free...
An index currently stands at 736 and has a volatility of 27% per annum. The risk-free rate of interest is 5.25% per annum and the index provides a dividend yield of 3.65% per annum. Calculate the value of a five-month European put with an exercise price of 730.
A stock price is $50 with annual volatility of 20%. Assume a risk-free rate of 6%...
A stock price is $50 with annual volatility of 20%. Assume a risk-free rate of 6% p.a. The strike price of a European put is $50 and the time to maturity is 4 months. Calculate the following Greeks for the put: 11.1 Delta 11.2 Theta 11.3 Gamma 11.4 Vega 11.5 Rho If the stock price changes by $2 over a short period of time, estimate the change in option price using the Greeks?
A futures price is currently $3000 and its volatility is 25%. The risk-free interest rate is...
A futures price is currently $3000 and its volatility is 25%. The risk-free interest rate is 5% per annum. a) Use a two-step binomial tree to derive the value today of a one-year European put option with a strike price of $2900 written on the futures contract. b) Use put-call parity to value the one-year European call option with a strike price of $2900 written on the futures contract. c) How would you hedge today a short position in the...
A futures price is currently $3000 and its volatility is 25%. The risk-free interest rate is...
A futures price is currently $3000 and its volatility is 25%. The risk-free interest rate is 5% per annum. a) Use a two-step binomial tree to derive the value today of a one-year European put option with a strike price of $2900 written on the futures contract. b) Use put-call parity to value the one-year European call option with a strike price of $2900 written on the futures contract. c) How would you hedge today a short position in the...
A stock index is currently 810 and has a volatility of 20% and a dividend yield...
A stock index is currently 810 and has a volatility of 20% and a dividend yield of 2%. The risk-free rate is 5%. Value a European six-month put option with a strike price of 800 using a two-step tree.
The volatility of a non-dividend-paying stock whose price is $45, is 20%. The risk-free rate is...
The volatility of a non-dividend-paying stock whose price is $45, is 20%. The risk-free rate is 3% per annum (continuously compounded) for all maturities. Use a two-step tree to calculate the value of a derivative that pays off [max(St − 48, 0)]" where is the stock price in four months?
ADVERTISEMENT
Subjects
ADVERTISEMENT
Latest Questions
ADVERTISEMENT