You calculated the following values for a two-year in-the-money American put with $5 intrinsic value on...

 

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You calculated the following values for a two-year in-the-money American put with $5 intrinsic value on a non-dividend paying stock currently trading at $98: Su=$127.40 Sd - $78.40 Assume n = 2, the risk-free rate is 8% per annum, and the stock is expected to grow at the same rate for the next two years. (12 points) (a) Calculate the stock prices after two years. (b) Calculate p and (1-p) rounding them to two-digit after decimal. (c) Calculate Pu², Pud, P², Pu, and Pa. (d) Calculate current price of the put. Calculate the time value of the put, the initial hedge ratio, and the rate of return for a hedged portfolio if the stock goes down after one period. You calculated the following values for a two-year in-the-money American put with $5 intrinsic value on a non-dividend paying stock currently trading at $98: Su=$127.40 Sd - $78.40 Assume n = 2, the risk-free rate is 8% per annum, and the stock is expected to grow at the same rate for the next two years. (12 points) (a) Calculate the stock prices after two years. (b) Calculate p and (1-p) rounding them to two-digit after decimal. (c) Calculate Pu², Pud, P², Pu, and Pa. (d) Calculate current price of the put. Calculate the time value of the put, the initial hedge ratio, and the rate of return for a hedged portfolio if the stock goes down after one period.

Answer rating: 100% (QA)

aAfter two years the stock prices would be Su 12740 and Sd 7840 The calculations are as follows Su 9... View the full answer