You are given the following information: Current stock price is 50 (stock pays no dividend) Annual...
Fantastic news! We've Found the answer you've been seeking!
Question:
Transcribed Image Text:
You are given the following information: Current stock price is 50 (stock pays no dividend) Annual stock volatility is 35% Risk-free rate (rƒ):4% Beta:0.75 Market risk premium: 8% Continuous compounding You purchased an European call option on this stock with a strike price of 55 (K). The option matures in two years and there two periods in total. Use the binominal tree pricing model to value this option by answering the following questions. Estimate the up rate of the stock (u), down rate of the stock (d) and risk neutral probability (p). Express your answers as a fraction and round to 4.d.p. Up Rate of the Stock Is Down Rate of the stock is Probability is To estimate the option premium, complete the following binomal tree. Round your answers to 4.d.p. T=0 Price 1 = Payoff 1 0 = First step Price 2 = Payoff 2= Price 3 Payoff 3= 1 Second step Price 4 = Payoff 4= Price 5 = Payoff 5= Price 6= Payoff 6= 2 You are given the following information: Current stock price is 50 (stock pays no dividend) Annual stock volatility is 35% Risk-free rate (rƒ):4% Beta:0.75 Market risk premium: 8% Continuous compounding You purchased an European call option on this stock with a strike price of 55 (K). The option matures in two years and there two periods in total. Use the binominal tree pricing model to value this option by answering the following questions. Estimate the up rate of the stock (u), down rate of the stock (d) and risk neutral probability (p). Express your answers as a fraction and round to 4.d.p. Up Rate of the Stock Is Down Rate of the stock is Probability is To estimate the option premium, complete the following binomal tree. Round your answers to 4.d.p. T=0 Price 1 = Payoff 1 0 = First step Price 2 = Payoff 2= Price 3 Payoff 3= 1 Second step Price 4 = Payoff 4= Price 5 = Payoff 5= Price 6= Payoff 6= 2
Expert Answer:
Answer rating: 100% (QA)
To value the European call option using the binomial t... View the full answer
Related Book For
An Introduction to the Mathematics of financial Derivatives
ISBN: 978-0123846822
2nd Edition
Authors: Salih N. Neftci
Posted Date:
Students also viewed these finance questions
-
KYC's stock price can go up by 15 percent every year, or down by 10 percent. Both outcomes are equally likely. The risk free rate is 5 percent, and the current stock price of KYC is 100. (a) Price a...
-
You are given the following information concerning a stock denoted by St (1) Current value =102. (2) Annual volatility = 30%. (3) You are also given the spot rate r = 50%, which is known to constant...
-
You are given the following information concerning a stock denoted by St. Current value = 102. Annual volatility = 30%. You are also given the spot rate r = 5%, which is known to be constant...
-
How to respond to the following? Cycle stock, pipeline inventory, buffer stock, and in-transit inventory all have associated carrying costs. Interest rates on inventory values, warehousing expenses,...
-
Consider the isentropic flow over an airfoil. The free stream conditions correspond to a standard altitude of 10,000 ft and M = 0.82. At a given point on the airfoil, M = 1.0. Calculate p and T at...
-
A five-year project has a net present value of \($160\) 000 when it is discounted at 12 per cent. The project includes an annual cash outflow of \($50\) 000 for each of the five years. No tax is...
-
Where to obtain the necessary facts to prove your clients position?
-
On January 1, 2010, Porter Company purchased an 80% interest in the capital stock of Salem Company for $850,000. At that time, Salem Company had capital stock of $550,000 and retained earnings of...
-
Exercise 2. Determine intervals of monotonicity as well as relative extrema of f(x) = xe. Exercise 3. Using l'Hospital's rule compute lim x-2* 874 x-(2-2).
-
Bud Peters opened a consulting company, and the following transactions resulted: 1. Bud invested $34,000 in the consulting agency. 2. Bought office equipment on account, $1,000. 3. Agency received...
-
Speedy Printers has the following data for its Sales and Expenses: Sales: January $50,000, February $30,000, March $30,000, April $40,000 Terms given to customers are: 1/10 net 30. 20% will pay in...
-
Xola has a curios shop where he sells traditional handmade crockery and utensils to customers. All customers, walk-in as well as corporate, pay for their purchases in full at the time of the sale....
-
Suppose electrons move through a copper wire at speed \(v\). Call the linear charge densities in the Earth reference frame \(\lambda_{E_{p}}\) for the fixed positive ions in the wire and...
-
Given the previous diagram and the following module-info.java for the panda module, what change can be made to the requires statement? A. exports transitive mammal; B. exports transitive mammal.eat;...
-
A painting company has determined that for every 115 square feet of wall space, one gallon of paint and eight hours of labor will be required. The company charges $20.00 per hour for labor. Design a...
-
The potential difference across the plates of a parallel-plate capacitor is gradually increased. (a) What happens when the breakdown threshold is exceeded? (b) If you want to increase the potential...
-
On your first job after your MBA program, you are expected to save $300 every month starting today for the next 5 years. You plan to invest in a 4% APR investment opportunity that will compound its...
-
What are some of the possible sources of information about a company that could be used for determining the companys competitive stance?
-
Suppose you are given the following SDE for the instantaneous spot rate: drt = r1dWt, where the Wt is a Wiener process under the real-world probability and the is a constant volatility. The initial...
-
Now place yourself exactly in the same setting as before, where the market quotes the above R. It just happens that you have a close friend who offers you the following separate bet, R*: Note that...
-
Now consider the function f (x) discussed in this chapter: (a) Take the integral and calculate (b) again, split the interval [0, 1] into 4 pieces,X0 = 0 By choosing the xi numerically.Calculate the...
-
An automobile's suspension system determines the vehicle's response to inputs from uneven road surfaces. Figure 3.56 shows a drawing of a suspension system that includes a coil spring, a shock...
-
For a mass-spring-damper system under harmonic loading per unit mass \(F(t) / m=\cos \omega t \mathrm{ft} / \mathrm{s}^{2}\), solve for the response amplitude for the case where \(k=\) \(20...
-
For the system in Figure 3.57, the forcing per unit mass is \(F(t) / m=10 \sin 15 t \mathrm{ft} / \mathrm{s}^{2}\). Solve for the transient response, the steady-state response, and the constants of...
Study smarter with the SolutionInn App