Nyx is interested in a 4-month European call option with a strike price of $100 on...
Fantastic news! We've Found the answer you've been seeking!
Question:
Transcribed Image Text:
Nyx is interested in a 4-month European call option with a strike price of $100 on a share in Olympus Technologies (OMP). The current price for an OMP share is $98. Nyx has analysed past data as well as used her experience to estimate the volatility of these shares to be 25% per annum. The risk-free continuously compounding interest rate is 4% per year. a) Construct a 4-step binomial tree showing the possible share prices over the next 4 months. Also, clearly show the corresponding probabilities for an upward and a downward movement in the share price. As a check, the numbers 91.1766 and 113.2169 should appear in your tree. [3 marks] b) Suppose that one month has passed and the share price has gone UP. Using the relevant portion of your binomial tree from part a) and the information given above, calculate the corresponding 3-step binomial tree for the remaining 3 months of the option, and clearly state the fair price of the option according to the given information. [4 marks] c) Using the 3-step binomial tree constructed in part b) (i.e. today is time t = 1), estimate the values of delta (A), theta (0), and gamma (T) ONLY. You do NOT need to calculate nu (v) and rho (p). [3 marks] Nyx is interested in a 4-month European call option with a strike price of $100 on a share in Olympus Technologies (OMP). The current price for an OMP share is $98. Nyx has analysed past data as well as used her experience to estimate the volatility of these shares to be 25% per annum. The risk-free continuously compounding interest rate is 4% per year. a) Construct a 4-step binomial tree showing the possible share prices over the next 4 months. Also, clearly show the corresponding probabilities for an upward and a downward movement in the share price. As a check, the numbers 91.1766 and 113.2169 should appear in your tree. [3 marks] b) Suppose that one month has passed and the share price has gone UP. Using the relevant portion of your binomial tree from part a) and the information given above, calculate the corresponding 3-step binomial tree for the remaining 3 months of the option, and clearly state the fair price of the option according to the given information. [4 marks] c) Using the 3-step binomial tree constructed in part b) (i.e. today is time t = 1), estimate the values of delta (A), theta (0), and gamma (T) ONLY. You do NOT need to calculate nu (v) and rho (p). [3 marks]
Expert Answer:
Answer rating: 100% (QA)
a To construct a 4step binomial tree for Nyxs European call option on Olympus Technologies OMP with ... View the full answer
Related Book For
Financial Management for Decision Makers
ISBN: 978-0138011604
2nd Canadian edition
Authors: Peter Atrill, Paul Hurley
Posted Date:
Students also viewed these finance questions
-
A stock price is currently $40. It is known that at the end of 1 month it will be either $44 or $36. The risk-free interest rate is 6% per annum with continuous compounding. What is the value of a...
-
The Crazy Eddie fraud may appear smaller and gentler than the massive billion-dollar frauds exposed in recent times, such as Bernie Madoffs Ponzi scheme, frauds in the subprime mortgage market, the...
-
Which of the following is not an example of supervised machine learning? O Clustering O Deep learning O Decision Tree Linear Regression
-
The human brain consumes about 22 W of power under normal conditions, though more power may be required during exams. (a) For what amount of time can one Snickers bar (see the note following Problem...
-
Identify the form of each of the following arguments and state whether the argument is valid or invalid: Men, it is assumed, act in economic matters only in response to pecuniary compensation or to...
-
George Oppenheimer, an agent for Wellington Farms of Massachusetts, Inc., had contacted Mark Kiriakou from the Capital Area Food Bank regarding an order for frozen turkey meat. In an exchange of...
-
First Republic Bancorp is considering the acquisition of a new data processing and management information system. The system, including computer hardware and software, will cost $1 million. Delivery...
-
Describe issues of healthcare provision during economic downturns. Consider some of the ethical issues presented by government financing. Explain with at least three hundred words
-
Dry methane is supplied by a compressor and precooling system to the cooler of a Linde liquid-methane system (Fig. 9.6) at 180 bar and 300 K. The low -pressure methane leaves the cooler at a...
-
space The speed of a parachutist who drops himself into calculated depending can be with an initial speed of zero time with the following expression: on V (+) = gm gm [-e-ct/m] Here, the gravitional...
-
An advantage of participation in multilevel marketing for those who do the selling is: Multiple choice question. buying most of the product available to them for their own use low cost of entry high...
-
LinkedIn is a business-oriented social networking service. Founded in December 2002 and launched on May 5, 2003, it is mainly used for professional networking. As of 2015, most of the site's revenue...
-
1. The basic purpose of preparing a trial balance is: A. to find out profit of the business B. to show financial position of the business C. to test arithmetical accuracy of the ledger D. to...
-
In relation to objections lodged by taxpayers which of the following statements is most correct? Question 3Select one: 1. A request for an extension of time to lodge an objection will not be...
-
A non-resident taxpayer has a taxable income of $49 000 with PAYG withholding amounts of $16 400 for the current year. He has no dependants and no private health insurance. His net tax to pay or...
-
Compute the pounds per barrel of CaCl, that should be added to the water phase of an oil mud to inhibit hydration of a shale having an activity of 0.8. If the oil mud will contain 30% water by...
-
What is master production scheduling and how is it done?
-
Kwaysar Limited sells television satellite dishes Doth to retail outlets and directly to the public. The balance sheet is as follows: In the second half of the financial year ended May 31, 2010, the...
-
The City of Moose Jaw has a budget surplus and can afford to set aside money today to fund future projects connected with the city's infrastructure. Required: Calculate the amount the city will have...
-
Use the data in (and your solutions to) Problems and Cases 8.2 and 8.3 to determine for each company whether it should factor its accounts receivables. In problem
-
See Table 2.5 showing financial statement data and stock price data for Mydeco Corp. a. Compute Mydecos PE ratio each year from 2019 to 2023. In which year was it the highest? b. What was Mydecos...
-
See Table 2.5 showing financial statement data and stock price data for Mydeco Corp. a. Compute Mydecos ROE each year from 2019 to 2023. b. Compute Mydecos ROA each year from 2019 to 2023. c. Which...
-
In early 2018, United Airlines (UAL) had a market capitalization of \($25.14\) billion, debt of \($12.73\) billion, and cash of \($5.59\) billion. United also had annual revenues of \($38.72\)...
Study smarter with the SolutionInn App