Question

In: Finance

What is the value of the option? If a binary option pays off R150 if a...

What is the value of the option? If a binary option pays off R150 if a stock price is greater than R40 in three months. The current stock price is R35 and its vootalitu is 35%.The risk free rate is 4 % and the expected return of the stock is 10%.

Secondly what is the Real - world probability that the payoff will be received?

Solutions

Expert Solution

By Using Black -Scholes Formula , Call Option Price =

= ​C=StN(d1​)−Ke−rtN(d2​)

​where :

C=Call option price

S=Current stock = R35

K=Strike price = R40

r=Risk-free interest rate = 4%

t=Time to maturity = 3 MONTHS

N=A normal distribution​

Solving the Equation we ll get Option Price = R0.92

jeff jeffy answered 2 years ago
Next > < Previous

Related Solutions

A binary call option pays $1 at expiry if the value of the underlying asset is...
A binary call option pays $1 at expiry if the value of the underlying asset is greater than the strike price, and $0 otherwise. The current interest rate is 3% pa. (a) Calculate the return R over one month. (b) Calculate all state prices at expiry for a ten-step binomial model where each time step is one month and the underlying asset is S=20, K=19, u=1.090, d=0.9173. That is, calculate all λ(10, j) for j = 0, 1, . ....
A binary option pays off $150 if a stock price is greater than $40 in three months.
A binary option pays off $150 if a stock price is greater than $40 in three months. The current stock price is $35 and its volatility is 35%. The risk-free rate is 4% and the expected return on the stock is 10%.3.1 What is the value of the option?3.2 What is the real-world probability that the payoff will be received?
Use black scholes model 9a. Calculate the value of a 6-month binary call option on the...
Use black scholes model 9a. Calculate the value of a 6-month binary call option on the asset that has a strike price of 75. b. Calculate the value of a 6-month binary put option on the asset that has a strike price of 75. assume the current spot price of the underlying assets is 77.50, its cash yield is 0.45%, its standard deviation is 0.725, and the risk free interest rates is 2.0%.
A cash-or-nothing option is another example of an exotic option in the 'binary options' category. For...
A cash-or-nothing option is another example of an exotic option in the 'binary options' category. For example, a cash-or-nothing European call pays off nothing if the asset price ends up below the strike price at maturity and pays a fixed amount, Q, if it ends up above the strike. Use the 4-step binomial tree to price the cash-or-nothing European call with the fixed payoff $20. Assume that the spot price is $100. The strike is $95. The time to maturity...
You are considering two lotery payment options: Option A pays $20000 today and option B pays...
You are considering two lotery payment options: Option A pays $20000 today and option B pays $40000 at the end of ten years. Assume you can earn 8 percent on your savings. a) Which option will you choose if you base your decision on present values? b) Which option will you choose if you base your decision on future values? c) Explain why your answers are either the same or different.
What are the entries when a customer pays off their old accounts receivable balance that was...
What are the entries when a customer pays off their old accounts receivable balance that was already written off?
1. Assuming A equals the binary value 10101010 and B equals the binary value 11110000, the...
1. Assuming A equals the binary value 10101010 and B equals the binary value 11110000, the result of the bitwise-OR of A with B is? Just enter the 8-bit binary number that represents the result of the operation. Do not add any spaces, decimal points, commas, or base-2 subscript. Do not delete leading zeros. 2. Assuming A equals the binary value 10101010 and B equals the binary value 11110000, the result of the bitwise-XOR of A with B is? Just...
What is the value of the following call option according to the Black Scholes Option Pricing...
What is the value of the following call option according to the Black Scholes Option Pricing Model? What is the value of the put options?                                                 Stock Price = $55.00                                               Strike Price = $50.00                                                Time to Expiration = 3 Months = 0.25 years.                                                 Risk-Free Rate = 3.0%. Stock Return Standard Deviation = 0.65. SHOW ALL WORK IN EXCEL
What is the value of the following call option according to the Black Scholes Option Pricing...
What is the value of the following call option according to the Black Scholes Option Pricing Model? What is the value of the put options? Stock Price = $37.63                                                Strike Price = $35.00                                                Time to Expiration = 3 Months = 0.25 years.                                                Risk-Free Rate = 4.0%.                                                Stock Return Standard Deviation = 0.65
What is the value of the following call option according to the Black Scholes Option Pricing...
What is the value of the following call option according to the Black Scholes Option Pricing Model? What is the value of the put options? Stock Price = $37.63 Strike Price = $35.00 Time to Expiration = 3 Months = 0.25 years. Risk-Free Rate = 4.0%. Stock Return Standard Deviation = 0.65.
ADVERTISEMENT
Subjects
ADVERTISEMENT
Latest Questions
ADVERTISEMENT