# Question: Suppose that S 100 K 100 r

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 6-month and 1-year prices. What are the possible arithmetic and geometric averages after 1 year?

b. Construct a binomial tree for the average. How many nodes does it have after 1 year?

c. What is the price of an Asian arithmetic average price call?

d. What is the price of an Asian geometric average price call?

a. Consider stock price averages computed by averaging the 6-month and 1-year prices. What are the possible arithmetic and geometric averages after 1 year?

b. Construct a binomial tree for the average. How many nodes does it have after 1 year?

c. What is the price of an Asian arithmetic average price call?

d. What is the price of an Asian geometric average price call?

**View Solution:**## Answer to relevant Questions

Using the information in the previous problem, compute the prices of a. An Asian arithmetic average strike call. b. An Asian geometric average strike call. Let S = $40, K = $45, σ = 0.30, r = 0.08, and δ = 0. Compute the value of knockout calls with a barrier of $60 and times to expiration of 1 month, 2 months, and so on, up to 1 year. As you increase time to expiration, what ...Using the information in Table 15.5, suppose we have a bond that after 2 years pays one barrel of oil plus λ × max(0, S2 − 20.90), where S2 is the year-2 spot price of oil. If the bond is to sell for $20.90 and oil ...A stock purchase contract with a zero initial premium calls for you to pay for one share of stock in 3 years. The stock price is $100 and the 3-year interest rate is 3%. a. If you expect the stock to have a zero dividend ...There is a single debt issue with a maturity value of $120. Compute the yield on this debt assuming that it matures in 1 year, 2 years, 5 years, or 10 years. What debt-to-equity ratio do you observe in each case?Post your question