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Consider a two-period binomial tree model with u = 1.05 and d = 0.90. Suppose the...

Consider a two-period binomial tree model with u = 1.05 and d = 0.90. Suppose the per-period interest rate is 2%. Suppose the initial stock price is $100. Consider $95-strike call and put options on this stock. Which of the following statement is false based on above information?

The put premium is $12.01

Possible payoffs of a call at the end of the two periods are $14.25, $0, and $0

Possible payoffs of a put at the end of the two periods are $14, $0.5, and $0

The call premium is $10.28

Solutions

Expert Solution

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

ALL FOUR OF THEM ARE FALSE.

TRUTH:

The put premium is $0.41

Possible payoffs of a call at the end of the two periods are $15.25, $0, and $0

Possible payoffs of a put at the end of the two periods are $0, $0, and $4.75

The call premium is $9.38

jeff jeffy answered 1 year ago
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