Question

In: Finance

A stock price is $100 now. In one month it can go 10% up or down....

A stock price is $100 now. In one month it can go 10% up or down. In the second month it can go 10% up or down. The annual interest rate is 10% with continuous compounding. Use risk-­‐free portfolios to determine the value of: (do not use probabilities) a) A two-­‐month European call with strike price 100 b) A two-­‐month European call with strike price 104

Solutions

Expert Solution

value of call option , s1 = value when price after 2 month goes up by 10% ,

hence , s1 = current stock price*(1+10%) = current stock price*(1+0.10)

similarly , s2 = stock price after 2 month if price goes down = current stock price*(1-10%) = current stock price*(1-0.10)

using these and the given values we calculate the hedge ratio and then the value of option.

jeff jeffy answered 1 year ago
Next > < Previous

Related Solutions

A stock with current price of $30 can only go up or down by $2 each...
A stock with current price of $30 can only go up or down by $2 each month. The probability that the stock goes up in price is 60% each month. The continuously compounding interest rate is 3% p.a. Use a binomial tree with 2 time steps to price an American put option with a strike of $32. Compute the value by setting up delta-hedged portfolios along the way and working out the cost.
A stock priced at 50 can go up or down by 10 percent over two periods....
A stock priced at 50 can go up or down by 10 percent over two periods. The risk-free rate is 4 percent. Which of the following is the correct price of an American put with an exercise price of 50? (10 points)
Suppose a stock currently trades at a price of 150. The stock price can go up...
Suppose a stock currently trades at a price of 150. The stock price can go up 33% or down 15%.The risk free rate is 4.5% 1. use a one period binomial model to calculate the price of a put option with exercise price of 150. 2. Suppose the put price is currently 14, show how to execute an arbitrage transaxtion that will earn more than the risk free rate . use 10,000 put options. 3. Suppose the put price is...
You are asked to price options on KYC stock. KYC’s stock price can go up by...
You are asked to price options on KYC stock. KYC’s stock price can go up by 15 percent every year, or down by 10 percent. Both outcomes are equally likely. KYC does not pay dividend. The risk free rate is 5% (EAR), and the current stock price of KYC is $100. Price a European put option on KYC with maturity of 2 years and a strike price of 100. Given the price of the put option that you calculated in...
A stock is currently selling for $50. The stock price could go up by 10 percent...
A stock is currently selling for $50. The stock price could go up by 10 percent or fall by 5 percent each month. The monthly risk-free interest rate is 1 percent. Calculate the price of an American put option on the stock with an exercise price of $55 and a maturity of two months. (Use the two-stage binomial method.) A. $5.10 B. $3.96 C. $4.78 D. $1.19 Why is it A
Consider a stock currently trading at 25 that can go up or down by 15% per...
Consider a stock currently trading at 25 that can go up or down by 15% per period. The risk-free rate is 10%. Use one-period binomial model. A. Find the value of the option today. B. Construct a hedge by combining a position in stock with a position in the call. Calculate the hedge ratio and show that return on the hedge portfolio is the real risk free regardless of the outcome, assuming that the call trading at the price obtained...
Consider a stock currently trading at 25 that can go up or down by 15% per...
Consider a stock currently trading at 25 that can go up or down by 15% per period. The risk-free rate is 10%. Use one-period binomial model. A. Find the value of the option today. B. Construct a hedge by combining a position in stock with a position in the call. Calculate the hedge ratio and show that return on the hedge portfolio is the real risk free regardless of the outcome, assuming that the call trading at the price obtained...
Consider a stock currently trading at 25 that can go up or down by 15 percent...
Consider a stock currently trading at 25 that can go up or down by 15 percent per period. The risk-free rate is 10 percent. Use one-period binomial model. a. Determine the two possible stock prices for the next period. b. Determine the intrinsic values at expiration of a European call with an exercise price of 25. c. Find the value of the option today. d. Construct a hedge by combining a position in stock with a position in the call....
Consider a stock currently trading at 25 that can go up or down by 15 percent...
Consider a stock currently trading at 25 that can go up or down by 15 percent per period. The risk-free rate is 10 percent. Use one-period binomial model. A. Determine the two possible stock prices for the next period. B. Determine the intrinsic values at expiration of a European call with an exercise price of 25. C. Find the value of the option today. D. Construct a hedge by combining a position in stock with a position in the call....
the stock under consideration is currently trading at K25 it can either go up or down...
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. Using a two-period binomial model, A. Determine the six possible stock prices for the next period. B. Determine the intrinsic values at expiration of a European call with an exercise price of 25. C. Find the value of the option today.
ADVERTISEMENT
Subjects
ADVERTISEMENT
Latest Questions
ADVERTISEMENT