A share is currently selling at $100. The price of this share may go up to...
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A share is currently selling at $100. The price of this share may go up to $110 or it may go down to $90 during the next three months. The exercise price of this share is $100. The current risk-free rate of return is 12%. Using the above information, answer the following questions: i. What is the probability that share price will go up to $110 during the next three months? ii. What is the current value of a European call option on this share? iii. Assume you hold 100 call options on this share. If the current market price of the option is $6.37, are there any arbitrage opportunities? If there are arbitrage opportunities, perform calculations to show the excess rate of return you could earn from the arbitrage. A share is currently selling at $100. The price of this share may go up to $110 or it may go down to $90 during the next three months. The exercise price of this share is $100. The current risk-free rate of return is 12%. Using the above information, answer the following questions: i. What is the probability that share price will go up to $110 during the next three months? ii. What is the current value of a European call option on this share? iii. Assume you hold 100 call options on this share. If the current market price of the option is $6.37, are there any arbitrage opportunities? If there are arbitrage opportunities, perform calculations to show the excess rate of return you could earn from the arbitrage.
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Answer rating: 100% (QA)
i The probability that the share price will go up to 110 during the next three months can be calculated using the binomial option pricing model Assumi... View the full answer
Related Book For
Advanced Financial Accounting
ISBN: 978-0137030385
6th edition
Authors: Thomas Beechy, Umashanker Trivedi, Kenneth MacAulay
Posted Date:
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