Let S = $100, K = $95, r = 8% (continuously compounded), = 30%, =
Question:
a. Verify that the binomial option price for an American call option is $18.283.
Verify that there is never early exercise; hence, a European call would have the same price.
b. Show that the binomial option price for a European put option is $5.979.
Verify that put-call parity is satisfied.
c. Verify that the price of an American put is $6.678.
Step by Step Answer:
a We can calculate for the different nodes of the tree node uu node ud du node dd delta 1 08966 0 B ...View the full answer
Related Video
A call option is a type of financial contract that gives the holder the right, but not the obligation, to buy an underlying asset (such as a stock, commodity, or currency) at a specified price (called the strike price) within a specified period of time. When an investor purchases a call option, they are essentially betting that the price of the underlying asset will rise above the strike price before the option\'s expiration date. If the price of the asset does rise above the strike price, the investor can exercise the option by buying the asset at the strike price and then selling it at the higher market price, thereby earning a profit. Call options are often used as a speculative investment strategy, as they allow investors to potentially profit from the upward movement of an asset without having to actually own the asset itself. They are also commonly used as a hedging tool to protect against potential losses in a portfolio.
Students also viewed these Corporate Finance questions
-
On September 1, Year 1 Western Company loaned $36,000 cash to Eastern Company. The one-year note carried a 5% rate of interest. The amount of interest revenue on the income statement and the amount...
-
An American call option is written on a stock whose price today is S = 50. The exercise price of the call is X = 45. a. If the call price is 2, explain how you would use arbitrage to make an...
-
Suppose an American call option is in the money, so S > X. Demonstrate that the market price of this call (C) cannot be less than the difference between the stock price and the exercise price. That...
-
Create the GUI in Fig. 14.2 (you do not have to provide functionality). Figure 14.2 Printer GUI Ok Printer. Bugalicious X9000 O Image O Selection Cancel Text O Current page Code ComboBox Setup....
-
Change in Accounting Principle, Leases. Romer Corporation began operations on January 1, 2013. The company decided to lease all plant assets rather than purchase them. Romer used the operating method...
-
2. Determine two different row-echelon forms for the following augmented matrix: - 3. Reduce the following augmented matrix to row-echelon form. Make sure that there are no fractions in the final...
-
Saturated steam at \(356 \mathrm{~K}\) condenses on a vertical tube of diameter \(5 \mathrm{~cm}\) whose surface is maintained at \(340 \mathrm{~K}\). Find the height at which the flow becomes wavy....
-
In the Fisk Company's negotiations with its employees' union on January 1, 2007, the company agreed to an amendment which substantially increased the employee benefits based on services rendered in...
-
Question 22 Daffodil Corporation had the following information this year: Account Sales Gain on Sale of Truck Sales Discounts COGS Expenses Loss on Flood Damage Dividends Declared Unearned Revenue...
-
Parrot Inc. acquired an 85% interest in Sparrow Corporation on January 2, 2014 for $42,500 cash when Sparrow had Capital Stock of $15,000 and Retained Earnings of $25,000. Sparrow's assets and...
-
Suppose S0 = $100, K = $50, r = 7.696% (continuously compounded), = 0, and T = 1. a. Suppose that for h = 1, we have u = 1.2 and d = 1.05. What is the binomial option price for a call option that...
-
Repeat the previous problem assuming that the stock pays a continuous dividend of 8% per year (continuously compounded). Calculate the prices of the American and European puts and calls. Which...
-
Nissan produces a car that sells in Japan for 1.8 million. On September 1, the beginning of the model year, the exchange rate is 150:$1. Consequently, Nissan sets the U.S. sticker price at $12,000....
-
Find a duplicate. Given an integer array of length n, with each value between 1 and n, write a code fragment to determine whether there are any duplicate values. You may not use an extra array (but...
-
Counting primes. Write a program PrimeCounter that takes an integer command-line argument n and finds the number of primes less than or equal to n. Use it to print out the number of primes less than...
-
Write a program DiscreteDistribution that takes a variable number of integer command-line arguments and prints the integer i with probability proportional to the ith command-line argument.
-
The code fragment in RandomSurfer that generates the random move fails if the probabilities in the row p[page] do not add up to 1. Explain what happens in that case, and suggest a way to fix the...
-
What are the values of m and n after executing the following code? int n = 123456789; int m= 0; while (n != 0) { } m (10 m) + (n % 10); n = n/ 10;
-
What moving average or exponential smoothing model would you recommend to forecast demand? Clearly show your results and explain your conclusions.
-
The process of collaborative goal setting by a manager and subordinate, the extent to which goals are accomplished is a major factor in evaluating and rewarding the subordinate's performance. It is...
-
Buffelheads stock price is $220 and could halve or double in each six-month period (equivalent to a standard deviation of 98 percent). A one-year call option on Buffelhead has an exercise price of...
-
Suppose that you own an American put option on Buffelhead stock (see question 5) with an exercise price of $220. (a) Would you ever want to exercise the put early? (b) Calculate the value of the put....
-
Recalculate the value of the Buffelhead call option (see question 5), assuming that the option is American and that at the end of the first six months the company pays a dividend of $25. (Thus the...
-
How does the 360-degree feedback method address the court's six stress issues depicted in Gerhart and Newman's reading? Since the Brito case, there has been growing evidence that the courts have very...
-
Read"Why Race Isn't as"Black"and White"as We Think"by Brent Staples. What can you find out about your own racial,religious,and cultural heritage? Search the Gateway library database: Ancestry Library...
-
Describe the classic steps for identifying an endocrine gland. Are these steps practical for identifying the sources of all the hormones we know of today? Explain.
Study smarter with the SolutionInn App