# Question: Suppose S 40 K 40 0 30

Suppose S = $40, K = $40, σ = 0.30, r = 0.08, and δ = 0.

a. What is the price of a standard European call with 2 years to expiration?

b. Suppose you have a compound call giving you the right to pay $2 1 year from today to buy the option in part (a). For what stock prices in 1 year will you exercise this option?

c. What is the price of this compound call?

d. What is the price of a compound option giving you the right to sell the option in part (a) in 1 year for $2?

a. What is the price of a standard European call with 2 years to expiration?

b. Suppose you have a compound call giving you the right to pay $2 1 year from today to buy the option in part (a). For what stock prices in 1 year will you exercise this option?

c. What is the price of this compound call?

d. What is the price of a compound option giving you the right to sell the option in part (a) in 1 year for $2?

## Answer to relevant Questions

Make the same assumptions as in the previous problem. a. What is the price of a standard European put with 2 years to expiration? b. Suppose you have a compound call giving you the right to pay $2 1 year from today to buy ...Let S = $40, σ = 0.30, r = 0.08, T = 1, and δ = 0. Also let Q = $60, σQ = 0.50, δQ = 0, and ρ = 0.5. In this problem we will compute prices of exchange calls with S as the price of the underlying asset and Q as the ...Suppose that S = $100, K = $100, r = 0.08, σ = 0.30, δ = 0, and T = 1. Construct a standard two-period binomial stock price tree using the method in Chapter 10. a. Consider stock price averages computed by averaging the ...Compute λ if the dividend on the CD is 0 and the payoff is $1300 - max (0, 1300 − S5.5) + λ × max(0, S5.5 − 2600) and the initial price is to be $1300. Using Figure 3.16 on page 85 as the basis for a discussion, explain under what circumstances an investor might prefer a PEPS to the stock or vice versa.Post your question