Consider the standard 1-period binomial model for a stock price, where one period corresponds to one...
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Consider the standard 1-period binomial model for a stock price, where one period corresponds to one year. Suppose the current price is 110 and it can increase to 145 with a risk-neutral probability 0.6 and decrease to 80 with a risk-neutral probability 0.4. There also is a European put option on the stock. The strike price of the option is your SSISID plus 81, SISSID is 38 in this case For example, if your SISSID is 123456, then the strike price is 81+1+2+3+4+5+6=102. The option matures in period 1. (A) Form a portfolio consisting of A shares and B put options. Can you find an A and B such that the portfolio has a payoff of 1 in both the up and down state? If so, provide formulas for A and B. If not, explain why. The number of digits should be such that you write A=x.xxxx and B=x.xxxx. (B) What is the continuously compounded interest rate between period 0 and 1? The number of digits should be such that you write r=(x)x.xxx%. (C) What is the price of the put option (write the price as P = (x)x.xxxx)? Consider the standard 1-period binomial model for a stock price, where one period corresponds to one year. Suppose the current price is 110 and it can increase to 145 with a risk-neutral probability 0.6 and decrease to 80 with a risk-neutral probability 0.4. There also is a European put option on the stock. The strike price of the option is your SSISID plus 81, SISSID is 38 in this case For example, if your SISSID is 123456, then the strike price is 81+1+2+3+4+5+6=102. The option matures in period 1. (A) Form a portfolio consisting of A shares and B put options. Can you find an A and B such that the portfolio has a payoff of 1 in both the up and down state? If so, provide formulas for A and B. If not, explain why. The number of digits should be such that you write A=x.xxxx and B=x.xxxx. (B) What is the continuously compounded interest rate between period 0 and 1? The number of digits should be such that you write r=(x)x.xxx%. (C) What is the price of the put option (write the price as P = (x)x.xxxx)?
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Answer rating: 100% (QA)
A To form a portfolio with a payoff of 1 in both the up and down states we need to set up a system of equations based on the two possible outcomes up ... View the full answer
Related Book For
Quantitative Investment Analysis
ISBN: 978-1119104223
3rd edition
Authors: Richard A. DeFusco, Dennis W. McLeavey, Jerald E. Pinto, David E. Runkle
Posted Date:
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