You use the following information to construct a one-period binomial forward tree for modeling the price movements
Question:
You use the following information to construct a one-period binomial forward tree for modeling the price movements of a nondividend-paying stock:
(i) The current stock price is 82.
(ii) The stock’s volatility is 30%.
(iii) The continuously compounded risk-free interest rate is 8%.
(iv) The continuously compounded expected return on the stock is 15%.
Calculate the expected rate of return on a 80-strike 1-year European call option.
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To calculate the expected rate of return on a 1year European call option with an 80strike we will use the oneperiod binomial forward tree model Given ...View the full answer
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