In a simple market one-period binomial tree model, we know that the simple compounding annual effective...
Fantastic news! We've Found the answer you've been seeking!
Question:
Transcribed Image Text:
In a simple market one-period binomial tree model, we know that the simple compounding annual effective interest rate is given by i = 8%. The stock price satisfies S(0) = 65 and S(1): = 80, with probabilit p, 40, with probabilit 1 - p, where 0 < p < 1. (a) Let us consider a Put option written on this stock with the strike price 60 and the maturity time T = 1. Find the initial price P(0) of this Put option. (b) Let us consider a Call option written on the Put option in part (a) with the strike price K = 10, i.e., the holder of this Call option has the right to get the payoff of the Put option in part (a) by paying the strike price K = 10. Find the initial price C(0) of this "call on put" option by constructing replication portfolio using stock and bank account. In a simple market one-period binomial tree model, we know that the simple compounding annual effective interest rate is given by i = 8%. The stock price satisfies S(0) = 65 and S(1): = 80, with probabilit p, 40, with probabilit 1 - p, where 0 < p < 1. (a) Let us consider a Put option written on this stock with the strike price 60 and the maturity time T = 1. Find the initial price P(0) of this Put option. (b) Let us consider a Call option written on the Put option in part (a) with the strike price K = 10, i.e., the holder of this Call option has the right to get the payoff of the Put option in part (a) by paying the strike price K = 10. Find the initial price C(0) of this "call on put" option by constructing replication portfolio using stock and bank account.
Expert Answer:
Answer rating: 100% (QA)
a P0 100 050 050 We know that the value of the Put option at time T is given by PT max0 KST where K ... View the full answer
Related Book For
Microeconomics An Intuitive Approach with Calculus
ISBN: 978-0538453257
1st edition
Authors: Thomas Nechyba
Posted Date:
Students also viewed these accounting questions
-
Tribeck Company is a family-owned business in which you own 20% of the common stock and your brothers and sisters own the remaining shares. The employment contract of Tribeck's new president, Jake...
-
A public corporation in which you own common stock reported a WACC of 11.1% for the year in its report to stockholders. The common stock that you own has averaged a total return of 7% per year over...
-
A public corporation in which you own common stock reported a WACC of 10.7% for the year in its annual report to stockholders. The common stock that you own has averaged a total return of 6% per year...
-
On January 1, 2014, Iron Mountain Ski Corporation purchased a new snow-grooming machine for $50,000. The machine is estimated to have a 10-year life with a $2,000 salvage value. What journal entry...
-
Suppose that a producer in China is constrained by the MFA to sell a certain number of shirts, regardless of the type of shirt. For a T-shirt selling for $2.00 under free trade, the MFA quota leads...
-
To qualify for a loan of $45,000, an applicant must have a gross income of $30,000 if single, $50,000 combined in-come if married, and assets of at least $10,000. Mr. Argento, married with two...
-
7. Jason Jacque was riding as a passenger in a car driven by his sister, who was drunk and driving 19 mph over the speed limit. She failed to negotiate a curve, skidded off the road, and collided...
-
Green Thumb operates a commercial plant nursery where it propagates plants for garden centers throughout the region. Green Thumb has $4,800,000 in assets. Its yearly fixed costs are $600,000, and the...
-
. Question Completion Status: Z.5 POTTIES Save Answer Mercanti Societa is considering a short term investment project that will last for three years based on a cost of capital of 12% per annum and...
-
On May 1, a petty cash fund was established for $150.00. The following vouchers were issued during May: REQUIRED 1. Prepare the journal entry to establish the petty cash fund. 2. Record the vouchers...
-
Describe inventory placement optimization within the supply chain.
-
(e) A and B are symmetric matrix show that AB - BA ia skewsymmetric matrix 12 1 2 (f) Find the value of the determinant A = 45 8 16 8 9 (g) Find the equation of line passes through the point (1, 2)...
-
Pop AG purchased 750 shares of outstanding preferred stock of its 90 percent affiliates, Ron AG on January 1, 2014 at $100 per share. The stockholders' equity at the time is as follow: Common...
-
Effective leadership can help cultivate a culture of change. Using the Internet, research change theories and change leadership. Respond to the following questions: . What does it mean to be a change...
-
Derive the dispersion relation ((k)) for a 1D monoatomic linear chain of atoms with mass M considering nearest neighbor interactions with spring constant 1 and second nearest neighbor interactions...
-
Consider the following list of costs/expenses/assets and answer the requirements that follow: 1. Orchard Land at cost 2,500,000 2. Orchard trees at FMV less cost to sell (Depreciated Cost/CV...
-
c-1 If the expected inflation rate is 2.90 percent, what are the approximate and exact expected real returns on the portfolio? (Do not round intermediate calculations. Enter your answers as a...
-
Identify the Critical Infrastructure Physical Protection System Plan.
-
I recently went out to dinner with my brother and my family. We decided we wanted wings for an appetizer and had a choice of getting 10 wings for $4.95 or 20 wings for $7.95. I thought we should get...
-
Brand Names and Franchise Fees: Suppose you are currently operating a hamburger restaurant that is part of a competitive industry in your city. A: Your restaurant is identical to others in its...
-
One of the most famous games treated in early game theory courses is known as the Battle of the Sexes and it bears close resemblance to the game in which you and I choose sides of the street when...
-
What is the key question that an auditor should ask according to the Panel on Audit Effectiveness?"
-
What change in auditing may have caused Enron, WorldCom, Xerox, and the other fraudulent situations?
-
What are some of the main points of SASNo. 99 ?
Study smarter with the SolutionInn App