You are the dealer in one of the reputable banks and one of your roles is...

You are the dealer in one of the reputable banks and one of your roles is related to trading and monitoring of changes in the derivative markets. You are interested in one stock for Bally International hedgers; the stock under consideration is currently trading at K25 it can either go up or down by 15 percent in any given period. The risk-free rate is 10 percent. You decide to take the long position in this stock at an exercise price of 20 with the contract expiry date 6 months from now.

Required:

i. At how much are you going to purchase the rights today?

ii. What is the time value of this Option?

iii. At how much will the rights in a Put option be trading at?

Solutions

Expert Solution

Here the dealer wants to go long on the stock ie purchase call option on the stock

We need to use the Binomial 1 period model to calculate the price of option.

In Binomial model, we need to calculate the risk neutral probabilities ,

jeff jeffy answered 1 year ago

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