Wildcat’s stock is volatile, you expect its stock price either increases or decreases by 30% over...

Wildcat’s stock is volatile, you expect its stock price either increases or decreases by 30% over
a year of time. suppose the current stock price is $100 and you have an American put option
with exercise price of $102. The option has two years to expiration. If the risk-free interest rate
is 10%.
a. What is the risk-neutral probability ππ for the up state?
b. Draw the binomial trees (two years) and mark the stock prices for each of the nodes.
c. For each of the nodes, work backwards and find the value of the option i) if it is kept, ii) if
it is exercised, and iii) the optimal choice.
d. Find the value of the American put option.
e. Is there any state in year one that the option holder would choose to exercise the option
early?

Expert Solution

A put option gives the option buyer the right to sell the Stock at a strike price.

The payoff of put option = Max(X-S,0) where S is stock price and X is exercise price.

In American put option, the option can be exercised before the maturity,

therefore payoff of the option at each period is compared to holding it for one more period.

jeff jeffy answered 2 years ago

Assume that the current stock price (S0) is £42, and that it either increases at a...

Assume that the current stock price (S0) is £42, and that it either increases at a rate of 10% (u = 1:10) or it decreases at a rate of 5% (d = 0:95) over a period of three months. Further assume a European call option written on the stock, with a strike price (K) equal to £40 and a time-to-maturity (T) equal to six months. The risk-free interest is 10% pa. (a) Draw a binomial tree showing the possible evolutions...

Stock price = £30. In 2 months, two months the price will be either £33 or...

Stock price = £30. In 2 months, two months the price will be either £33 or £27. The risk-free interest rate is 10% p.a on a continuous compounding basis. What will be the value of a 2-month European put option with a strike price of £31? Please provide a step by step explanation as I would like to fully understand and not just copy the answer. Thank you :)

The price of oil is currently at $24 but you expect it to either increase by...

The price of oil is currently at $24 but you expect it to either increase by 18 percent or decrease by 7 percent over the next 6 months. The 6-month risk-free rate of interest is 1.98 percent. What is the risk-neutral probability that the price will increase? Group of answer choices 35.92% 32.47% 37.94% 38.06% 36.03% 2 Executive stock options generally have all of the following characteristics except: Group of answer choices putting executive pay at risk. providing tax efficiency....

A non-dividend stock is trading at $30 and the stock price either moves up or down...

A non-dividend stock is trading at $30 and the stock price either moves up or down by 10% every three months. The risk-free interest rate is 5% p.a. (c.c.). Use the two-period binomial model to value a six-month European put option on the stock with an exercise price of $31

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...

Tilda Co. stock is currently priced at $48. You expect its price in one year to...

Tilda Co. stock is currently priced at $48. You expect its price in one year to be $54 and do not expect any dividends to be paid. The risk free rate is 5%, and the overall market is expected to return 10%. a. What will be the current price of Tilda Co. if the expected future price remains the same but its covariance with the market triples? b. Assume that the actual price is more than what you have calculated...

1. The quantity demanded of a product generally __________(increases/decreases) as the price of the product...

1. The quantity demanded of a product generally __________ (increases/decreases) as the price of the product falls, ceteris paribus.2. The supply curve depicts the relationship between the __________ and the __________.3. From the following list, choose the variables that are held fixed when drawing a market supply curve:•The price of the product •Wages paid to workers •The price of materials used in production •Taxes paid by producers •the quantity of the product purchased

The market price of Fintech stock has been very volatile and you think this volatility will...

The market price of Fintech stock has been very volatile and you think this volatility will continue for a few weeks. Thus, you decide to purchase a 1-month call option contract with a strike price of $35 and an option price of $1.82. You also purchase a 1-month put option on the stock with a strike price of $35 and an option price of $.91. What will be your total profit or loss on all the transactions related to these...

Question