Question

In: Finance

The current price of a non-dividend-paying stock is $80. Over the next year it is expected...

The current price of a non-dividend-paying stock is $80. Over the next year it is expected to rise to $92 or fall to $79. Assume the risk free rate is 5%. An investor buys a put option with a strike price of $84. What is the value of the option today? How would the investor hedge the put option position? Assume that the option is written on 100 shares of stock.

Solutions

Expert Solution

Dear Reader

The question is based on the binomial model.

In second part of question (where it is asked to protect put position), name of strategy and concept of strategy is explained.

Happy Reading ✌️

Stay Safe!


Related Solutions

The current price of a non-dividend-paying stock is $80. Over the next year it is expected...
The current price of a non-dividend-paying stock is $80. Over the next year it is expected to rise to $86 or fall to $76. An investor buys put options with a strike price of $82. Which of the following is necessary to hedge the position? Select one: a. Buy 0.6 shares for each option purchased b. Sell 0.6 shares for each option purchased c. Buy 0.8 shares for each option purchased d. Sell 0.8 shares for each option purchased
The current price of a non-dividend-paying stock is $30. Over the next six months it is...
The current price of a non-dividend-paying stock is $30. Over the next six months it is expected to rise to $36 or fall to $28. Assume the risk-free rate is 10% per annum (continuously compounded). What, to the nearest cent, is the price of an American put option with a strike price of $33? (Your answer should be in the unit of dollar, but without the dollar sign. For example, if your answer is $1.02, just enter 1.02.)
The current price of a non-dividend-paying stock is $30. Over the next six months it is...
The current price of a non-dividend-paying stock is $30. Over the next six months it is expected to rise to $36 or fall to $28. Assume the risk-free rate is 10% per annum. What, to the nearest cent, is the price of a European put option with a strike price of $33? (Your answer should be in the unit of dollar, but without the dollar sign. For example, if your answer is $1.02, just enter 1.02.)
The current price of a non-dividend-paying stock is $50. Over the next six months it is...
The current price of a non-dividend-paying stock is $50. Over the next six months it is expected to rise to $60 or fall to $48. Assume the risk-free rate is zero. An investor sells call options with a strike price of $55. What is the value of each call option according to the one-step binomial model? Please enter your answer as a number rounded to two decimal places (with no dollar sign).
The current price of a non-dividend-paying stock is $30. Over the next three months it is...
The current price of a non-dividend-paying stock is $30. Over the next three months it is expected to rise to $36 or fall to $26. Assume that the risk-free rate is 10% per annum (continuously compounded). What is the risk-neutral probability of the stock price moving up to $36? a) .40 b) .48 c) .50 d) .60
A non-dividend paying stock has a current price of 80 and has a volatility of 20%....
A non-dividend paying stock has a current price of 80 and has a volatility of 20%. The risk-free rate is 4%. Determine the price of a European put option on the stock with a strike price of 75 and one year to maturity. Use a two-step binomial tree Use the Black-Scholes formula
The price of a non-dividend paying stock is now $40. Over each of the next two...
The price of a non-dividend paying stock is now $40. Over each of the next two three-month periods, it is expected to go up by 10% or down by 10%. The risk-free interest rate is 4% per annum with continuous compounding. a. Calculate the risk-neutral probability p of an up-move over each three-month period b. Calculate the value of a six-month European call option with a strike price of $42 c. Calculate the value of a six-month European put option...
A price on a non-dividend paying stock is currently £50. Over each of the next two...
A price on a non-dividend paying stock is currently £50. Over each of the next two six-month periods the stock is expected to go up by 5% or down by 10%. The risk- free interest rate is 3% per annum with continuous compounding. (a) What is the value of a one-year European call option with a strike price of £48? (b) What is the value of a one-year American call option with a strike price of £48? (c) Discuss how...
A non – dividend – paying stock with a current price of $52, the strike price...
A non – dividend – paying stock with a current price of $52, the strike price is $50, the risk free interest rate is 12% pa, the volatility is 30% pa, and the time to maturity is 3 months? a) Calculate the price of a call option on this stock b) What is the price of a put option price on this stock? c) Is the put-call parity of these options hold? (4 + 4 + 2 = 10 marks)...
The current price of a non-dividend-paying stock is $32.59 and you expect the stock price to...
The current price of a non-dividend-paying stock is $32.59 and you expect the stock price to either go up by a factor of 1.397 or down by a factor of 0.716 over the next 0.7 years. A European put option on the stock has a strike price of $33 and expires in 0.7 years. The risk-free rate is 3% (annual, continuously compounded). Part 1. What is the option payoff if the stock price goes down? Part 2. What is the...
ADVERTISEMENT
ADVERTISEMENT
ADVERTISEMENT