Problem 1. Consider a stock S in a binary two-period model with value 100 USD at time
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Problem 1. Consider a stock S in a binary two-period model with value 100 USD at time t = 0. We assume that the value in each node increases by 27.5 percent in the up-state and decreases with 10 percent in the down-state. The risk free interest rate r = 5 percent.
(i) Calculate the risk neutral probability distribution at maturity T = 2.
(ii) A European put option gives the owner the right to sell the stock at maturity at the strike price K. Calculate the value of such a put option in each of the states at maturiy.
(iii) Calculate the arbitrage-free price p of a European put option written on the stock S with strike price K = 111 USD.
Related Book For
Introduction to Accounting An Integrated Approach
ISBN: 978-0078136603
6th edition
Authors: Penne Ainsworth, Dan Deines
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