Suppose S = $100, K = $95, r = 8% (continuously compounded), t = 1, σ = 30%, and δ = 5%. Explicitly construct an eight-period binomial tree using the Cox-Ross Rubinstein expressions for u and d:
Compute the prices of European and American calls and puts.
Answer to relevant QuestionsCompute the prices of European and American calls and puts. Repeat Problem 11.4, only set δ = 0.08. What is the lowest strike price at which early exercise will occur? What condition related to put-call parity is satisfied at this strike price? In the absence of an explicit formula, we can estimate the change in the option price due to a change in an input-such as σ-by computing the following for a small value of : a. What is the logic behind this calculation? Why ...Consider a perpetual put option with S = $50, K = $60, r = 0.06, σ = 0.40, and δ = 0.03. a. What is the price of the option and at what stock price should it be exercised? b. Suppose δ = 0.04 with all other inputs the ...Make the same assumptions as in the previous problem. a. What is the 9-month forward price for the stock? b. Compute the price of a 95-strike 9-month call option on a futures contract. c. What is the relationship between ...
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