Given the maturity of an American put option 2 years, riskfree rate 10%, volatility of the...

Given the maturity of an American put option 2 years, riskfree rate 10%, volatility of the stock 40%, current spot price of stock $50, strike price $50, what is the value of option when stock price is 96.084 in step 2, considering a 3-step binomial tree?

	A.	6.291
	B.	13.931
	C.	10.204
	D.	0

Solutions

Expert Solution

Answer of the above question is given below.

Determining Stock Prices

To agree on accurate pricing for any tradable asset is challenging—that’s why stock prices constantly change. In reality, companies hardly change their valuations on a day-to-day basis, but their stock prices and valuations change nearly every second. This difficulty in reaching a consensus about correct pricing for any tradable asset leads to short-lived arbitrage opportunities.

But a lot of successful investing boils down to a simple question of present-day valuation– what is the right current price today for an expected future payoff?

Binominal Options Valuation

In a competitive market, to avoid arbitrage opportunities, assets with identical payoff structures must have the same price. Valuation of options has been a challenging task and pricing variations lead to arbitrage opportunities. Black-Scholes remains one of the most popular models used for pricing options but has limitations.1

The binomial option pricing model is another popular method used for pricing options.

So this will be option c 10.204.

jeff jeffy answered 1 year ago

Next > < Previous

Related Solutions

Binominal Option Pricing in One Period The simple riskfree rate is 10%. The current stock price...

Binominal Option Pricing in One Period The simple riskfree rate is 10%. The current stock price is 60. In one period, the underlying stock price may go up to 90 or down to 54. What are the payoffs of the European put option with K=72 in the up and down states? What are the risk-neutral probabilities for the two states in one period? What is the price of the European put today? Would the value of the corresponding American put...

A stock is trading at $42 and its volatility is 35%. You own a put option...

A stock is trading at $42 and its volatility is 35%. You own a put option with a strike price of $45 and one year to maturity. The risk-free rate is 2% per annum compounded continuously. (a) How many stocks should you buy or short so that a small change in stock price has no effect on your portfolio (put and the position in stocks)? (b) Given the portfolio you chose in (a), if stock price increases by a large...

2. A bond has 10 years to maturity, a 7.8% annual coupon rate, and sells for...

2. A bond has 10 years to maturity, a 7.8% annual coupon rate, and sells for $985. Assume coupon payments are made semi-annually. (3 points) a. What is the current yield for this bond? b. What is the YTM? c. Assume that the YTM remains constant for the next 6 years. What will the price be 6 years from today? (Worked needed)

When would you exercise an American call option? When would you exercise an American put option?

Please prove call option and put option with the same maturity are having exactly the same...

Please prove call option and put option with the same maturity are having exactly the same option premium, if their strike prices are the same and are forward price.

There is an American put option on a stock that expires in two months. The stock...

There is an American put option on a stock that expires in two months. The stock price is $55, and the standard deviation of the stock returns is 64 percent. The option has a strike price of $62, and the risk-free interest rate is an annual percentage rate of 4.4 percent. What is the price of the option? Use a two-state model with one-month steps. (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.)...

There is an American put option on a stock that expires in two months. The stock...

There is an American put option on a stock that expires in two months. The stock price is $100 and the standard deviation of the stock returns is 72 percent. The option has a strike price of $112 and the risk-free interest rate is an annual percentage rate of 5.6 percent. What is the price of the option? Use a two-state model with one-month steps

There is an American put option on a stock that expires in two months. The stock...

There is an American put option on a stock that expires in two months. The stock price is $69 and the standard deviation of the stock returns is 59 percent. The option has a strike price of $78 and the risk-free interest rate is an annual percentage rate of 5.8 percent. What is the price of the option? Use a two-state model with one-month steps. (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.)

A bond price is $1,135.90. The maturity is 10 years. The coupon rate is 10%. Payments...

A bond price is $1,135.90. The maturity is 10 years. The coupon rate is 10%. Payments are semi-annual. Face value is $1,000. Solve for the YTM. Input your answer as whole percentage with two decimal places (x.xx), so 9.5% is input as 9.50. Hint: first solve for the RATE by adjusting for semiannual again, then multiply this result by 2 to bring it back to annual. The PMT and FV have the same sign since they are inflows to the...

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.

Subjects