1. On 4/13/21 Morgan Stanley (MS) is priced at $79.70 and you wish to value the...

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1. On 4/13/21 Morgan Stanley (MS) is priced at $79.70 and you wish to value the 9/17/21 (157 days) 0.2% and a $0.35 dividend will be paid = 27.9%. Over that period, r = K = $80 call option with o = in 17 and 108 days. (a) (5 points) Compute a 15-step binomial tree using the Schroder method: First generate the price tree for the prepaid forwards then at each time step, add back the PV of the expected dividends to get the underlying stock price. (b) (3 points) Compute the price of the European and American call options. (c) (2 points) Since European options can be priced with the Black-Scholes model, what is the price of K = 80 call with 157 days to expiration? Use formula found on slide 12-10. (d) What is the risk-neutral probability that you wil pay the strike price? (i) (3 points) Using the binomial tree? Using the formula found on slide 11-14 (ii) (1 points) Using Black-Scholes? Recall slide 12-4. (e) (3 points) Suppose MS unexpectedly suspends dividends to be paid in 17 and 108 days, what are the respective European and American call option prices? Use Black-Scholes to price the European option. Note: You cannot use the BT model in R to solve this since it has not been implemented for stocks with discrete dividends! If you set this up in Excel, solving is much easier, especially changing assumptions for part (e). 1. On 4/13/21 Morgan Stanley (MS) is priced at $79.70 and you wish to value the 9/17/21 (157 days) 0.2% and a $0.35 dividend will be paid = 27.9%. Over that period, r = K = $80 call option with o = in 17 and 108 days. (a) (5 points) Compute a 15-step binomial tree using the Schroder method: First generate the price tree for the prepaid forwards then at each time step, add back the PV of the expected dividends to get the underlying stock price. (b) (3 points) Compute the price of the European and American call options. (c) (2 points) Since European options can be priced with the Black-Scholes model, what is the price of K = 80 call with 157 days to expiration? Use formula found on slide 12-10. (d) What is the risk-neutral probability that you wil pay the strike price? (i) (3 points) Using the binomial tree? Using the formula found on slide 11-14 (ii) (1 points) Using Black-Scholes? Recall slide 12-4. (e) (3 points) Suppose MS unexpectedly suspends dividends to be paid in 17 and 108 days, what are the respective European and American call option prices? Use Black-Scholes to price the European option. Note: You cannot use the BT model in R to solve this since it has not been implemented for stocks with discrete dividends! If you set this up in Excel, solving is much easier, especially changing assumptions for part (e).

Answer rating: 100% (QA)

a Binomial tree with 15 steps for Morgan Stanley stock price Period t Price u Price d 0 7970 7970 ... View the full answer