Question: 1a) Let S = $55, K = $50, r = 6% (continuously compounded), d = 2%, s = 40%, T = 0.5, and n =
1a)
| Let S = $55, K = $50, r = 6% (continuously compounded), d = 2%, s = 40%, T = 0.5, and n = 5. In this situation, the appropriate values of u and d are 1.13939 and 0.88471, respectively. What is the value of p*, the risk-neutral probability of an upward movement in the stock price at any node of the binomial tree? | |||||||||||||
| |||||||||||||
1b)
| Let S = $65, r = 3% (continuously compounded), d = 5%, s = 30%, T = 2. In this situation, the appropriate values of u and d are 1.32313 and 0.72615, respectively. Using a 2-step binomial tree, calculate the value of a $55-strike European call option. | |||||||||||||
| |||||||||||||
1c)
| Let S = $40, r = 5% (continuously compounded), d = 4%, s = 20%, T = 1.5. In this situation, the appropriate values of u and d are 1.19806 and 0.84730, respectively. Using a 2-step binomial tree, calculate the value of a $30-strike American call option. | |||||||||||||
| |||||||||||||
1d)
| Suppose the exchange rate is $1.51/. Let r$ = 6%, r = 7%, u = 1.34, d = 0.73, and T = 2. Using a 2-step binomial tree, calculate the value of a $1.45-strike European call option on the euro. | |||||||||||||
| |||||||||||||
1e)
| Suppose the exchange rate is $1.14/C$. Let r$ = 7%, rC$ = 4%, u = 1.33, d = 0.79, and T = 1.5. Using a 2-step binomial tree, calculate the value of a $1.20-strike American put option on the Canadian dollar. | |||||||||||||
| |||||||||||||
Step by Step Solution
There are 3 Steps involved in it
Get step-by-step solutions from verified subject matter experts
Study Help