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A non-dividend paying stock price is currently selling for $X.  It is known that at the end...

A non-dividend paying stock price is currently selling for $X.  It is known that at the end of three months the stock price will be either $3.50 or $5.50. The risk-free rate of interest is 10 percent per annum (quarterly compounding).  The value of a three-month European put option on the stock with an exercise price of $5.00 is currently selling for $0.75.

Use a one-period binomial model.

Required

Determine the “fair” value today of the share (i.e. $X) based on a replicating portfolio constructed by taking a position in shares and a riskless asset or a risk-free bond.

Solutions

Expert Solution

Solution.>

Using one-period Binomial formula:

A non-dividend paying stock price is currently selling for $4.36

I have solved this question in Excel. The formula used are shown in another excel file. If you still have any doubt, kindly ask in the comment section.

The formula used are:

Note: Give it a thumbs up if it helps! Thanks in advance!

jeff jeffy answered 1 year ago
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