A stock index is currently trading at 50. Paul Tripp, CFA, wants to value 2-year index options
Question:
A stock index is currently trading at 50. Paul Tripp, CFA, wants to value 2-year index options using the binomial model. The stock will either increase in value by 20% or fall in value by 20%. The annual risk-free interest rate is 6%. No dividends are paid on any of the underlying securities in the index.
a. Construct a two-period binomial tree for the value of the stock index.
b. Calculate the value of a European call option on the index with an exercise price of 60.
c. Calculate the value of a European put option on the index with an exercise price of 60.
d. Confirm that your solutions for the values of the call and the put satisfy put-call parity.
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Step by Step Answer:
a The two possible values of the index in the first period are ...View the full answer
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