Question

In: Finance

A non-dividend paying stock has a current price of 80 and has a volatility of 20%....

A non-dividend paying stock has a current price of 80 and has a volatility of 20%. The risk-free rate is 4%. Determine the price of a European put option on the stock with a strike price of 75 and one year to maturity.

  1. Use a two-step binomial tree
  2. Use the Black-Scholes formula

Solutions

Expert Solution

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

Standard deviation 20%
Time period (months) 6
u= e^(Standard deviation)*( Time each period/12)0.5
u= 1.1519
d=1/u= 0.8681

1

2.

jeff jeffy answered 2 years ago
Next > < Previous

Related Solutions

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?
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(?! − 48, 0)]" where ST is the stock price in four months?
The current price of a non-dividend-paying stock is $80. Over the next year it is expected...
The current price of a non-dividend-paying stock is $80. Over the next year it is expected to rise to $86 or fall to $76. An investor buys put options with a strike price of $82. Which of the following is necessary to hedge the position? Select one: a. Buy 0.6 shares for each option purchased b. Sell 0.6 shares for each option purchased c. Buy 0.8 shares for each option purchased d. Sell 0.8 shares for each option purchased
The current price of a non-dividend-paying stock is $80. Over the next year it is expected...
The current price of a non-dividend-paying stock is $80. Over the next year it is expected to rise to $92 or fall to $79. Assume the risk free rate is 5%. An investor buys a put option with a strike price of $84. What is the value of the option today? How would the investor hedge the put option position? Assume that the option is written on 100 shares of stock.
Suppose that the price of a non-dividend-paying stock is $32, its volatility is 30%, and the...
Suppose that the price of a non-dividend-paying stock is $32, its volatility is 30%, and the risk-free rate for all maturities is 5% per annum. Use DerivaGem to calculate the the cost of setting up the following positions:             (a) a bull spread using European call options with strike prices of $25 and $30 and a maturity of 6 months             (b) a bear spread using European put options with strike prcies of $25 and $30 and a maturity of 6 months...
q 20 A non-dividend paying stock is currently trading at $60 and its volatility is 20%...
q 20 A non-dividend paying stock is currently trading at $60 and its volatility is 20% per annum. Risk free rate is 12% per annum. Consider a European call option with a strike price of $58 that will expire in three months. What is the price of this call option based on Black-Scholes model?   (Enter your answer in two decimals without $ sign)
A non – dividend – paying stock with a current price of $52, the strike price...
A non – dividend – paying stock with a current price of $52, the strike price is $50, the risk free interest rate is 12% pa, the volatility is 30% pa, and the time to maturity is 3 months? a) Calculate the price of a call option on this stock b) What is the price of a put option price on this stock? c) Is the put-call parity of these options hold? (4 + 4 + 2 = 10 marks)...
The current price of a non-dividend-paying stock is $32.59 and you expect the stock price to...
The current price of a non-dividend-paying stock is $32.59 and you expect the stock price to either go up by a factor of 1.397 or down by a factor of 0.716 over the next 0.7 years. A European put option on the stock has a strike price of $33 and expires in 0.7 years. The risk-free rate is 3% (annual, continuously compounded). Part 1. What is the option payoff if the stock price goes down? Part 2. What is the...
The current price of a non-dividend-paying stock is $266.72 and you expect the stock price to...
The current price of a non-dividend-paying stock is $266.72 and you expect the stock price to be either $293.39 or $242.47 after 0.5 years. A European call option on the stock has a strike price of $270 and expires in 0.5 years. The risk-free rate is 3% (EAR). Part 1. What is the hedge ratio (delta)? Part 2. How much money do you need to invest in riskless bonds to create a portfolio that replicates the payoff from one call...
The current price of a non-dividend-paying stock is $100 and you expect the stock price to...
The current price of a non-dividend-paying stock is $100 and you expect the stock price to be either $180 or $40 after 0.5 years. A European call option on the stock has a strike price of $121 and expires in 0.5 years. The risk-free rate is 8% (EAR). Part 1. What is the hedge ratio (delta)? Part 2. How much money do you need to borrow to create a portfolio that replicates the payoff from one call option? Part 3.  What...
ADVERTISEMENT
Subjects
ADVERTISEMENT
Latest Questions
ADVERTISEMENT