Let S(t) be the time-t price of a nondividend-paying stock. For a three-period binomial stock price model,

Question:

Let S(t) be the time-t price of a nondividend-paying stock. For a three-period binomial stock price model, you are given:

(i) The length of each period is one year.

(ii) S(0) = 100.

(iii) u = 1.1, where u is one plus the percentage change in the stock price per period if the price goes up.

(iv) d = 1/1.1, where d is one plus the percentage change in the stock price per period if the price goes down.

(v) The continuously compounded risk-free interest rate is 5%.

Consider a special derivative which pays, at the end of three years,

Calculate the current price of this derivative.

Fantastic news! We've Found the answer you've been seeking!

Step by Step Answer:

Related Book For answer-question

Derivative Pricing

ISBN: 9780367734213

1st Edition

Authors: Ambrose Lo

See More Books

Question Posted: Nov 22, 2023 08:05 AM

See More 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...
Managing Scope Changes Case Study Scope changes on a project can occur regardless of how well the project is planned or executed. Scope changes can be the result of something that was omitted during...
Last Sale Net Bid Ask Open Int Puts Last Sale Net bid Ask Vol Open Int 16Aug 155.00(1619H155-E) 6.45 0.75 6.95 7.25 9 16Aug 155.00(1619T155-E) 1.18 (0.75) 1.17 1.25 61 4505 16Aug 166.00(1619H160-E)...
The standard cost card for Balsam indicates each unit of product should take 1.5 hours of direct labor at a cost of $10 per hour. During the current period, Balsam produced 3,000 units, used 5,000...
To implement interperiod income tax allocation, an accountant must be able to distinguish between permanent and temporary differences. The following is a list of three differences between a...
Discuss the two important questions a marketing manager must answer when designing a winning marketing strategy. How should a manager approach finding answers to these questions?
Cat Auto Tech. Corp. purchased 10,000 gift certificates from DeJesus. Cat Auto Tech. Corp., an Amoco gasoline station operator, contracted with DeJesus to make 10,000 gift certificates of various...
Hazlett, Inc., operates at capacity and makes plastic combs and hairbrushes. Although the combs and brushes are a matching set, they are sold individually and so the sales mix is not 1: 1. Hazletts...
In Figure 32.14, the battery has an emf of 12.0 V, the inductance is L, and the capacitance C is 9.0 pF. The switch has been set to position a for a long time so that the capacitor is charged. The...
For a two-period binomial model for stock prices, you are given: (i) The length of each period is one year. (ii) The current price of a nondividend-paying stock is $150. (iii) u = 1.25, where u is...
You are to estimate a nondividend-paying stocks annualized volatility using its prices in the past nine months. Calculate the historical volatility for this stock over the period. (A) 83% (B) 77% (C)...
Colwell Recycling recycles newsprint, cardboard, and so forth, into recycled packaging materials. For the coming year, Colwell Recycling estimates total manufacturing overhead to be $ 348,950. The...
Harrison Company reported the following cost information: November December Variable costs $ 1 8 , 0 0 0 ? Fixed costs $ 2 4 , 0 0 0 ? Mixed costs $ 3 0 , 0 0 0 ? Total costs $ 7 2 , 0 0 0 $ 8 9 , 0...
The margin of safety in dollars is the difference between sales revenue at the break - even point and sales revenue at a determined activity level. True False
The following equally likely outcomes have been estimated for the returns on Portfolio P and Portfolio Q: Scenario Portfolio P Portfolio Q 1 4.0% 11.0% 2 7.0% -7.0% 3 -3.0% 15.0% 4 9.0% -9.0%...
Goode presents cooking as an adventure, writing, for example, that when he adds wine to a dish he springs into action and wedges the wine bottle between his thighs . Two strategies he uses to...
Betty Bat loves the Vancouver Canucks. She has followed their exploits since she was five years old and believes they will win the Stanley Cup this season. She has $1,000 savings that she has hidden...
Quattro, Inc. has the following mutually exclusive projects available. The company has historically used a 4-year cutoff for projects. The required return is 11 percent. a. Compute the payback for...
Give codons for the following amino acids: (a) Th (b) Asp (c) Thr
One strategy for solving a complex problem is to break the problem into a group of less complex problems and then find solutions to the smaller problems. The result is the solution of the complex...
On her first engineering job, Joy Hayes was given the responsibility of determining the production rate for a new product. She has assembled data as indicated on the graphs: (a) Select an appropriate...
Willie Lohmann travels from city to city in the conduct of his business. Every other year he buys a used . car for about $12,000. The auto dealer allows about $8000 as a trade-in allowance with the...
Need a good solid explanation on ethical leadership and some gray area that can be posed by it. Like in what case ethical leadership can lead to a poor decisions over common sense. ?
Calculate the payback period for the following investment: Invest (10,000). Cash flows in Yr1: 1,000; Yr2: 3,000; Yr3: 3,000; Yr4: 3,000; Yr5: 100,000; Yr6: 250,000.
Authentic leadership and ethical leadership are today's popular models of leadership. a. Discuss Leadership Definition and Complexities. b. Discuss Authentic leadership Definition(s), Main...

Let S(t) be the time-t price of a nondividend-paying stock. For a three-period binomial stock price model,

Question:

max {S(2) 100, 0} + max{S(3) 100,0}. -

Step by Step Answer:

The 3period binomial tree is constructed ...View the full answer

Derivative Pricing

Students also viewed these Business questions