1.Suppose a stock that pays no dividends is trading at 100 and has a volatility of 40%. 

The risk-free rate is 4% (continuously compounded). You own a three-month, at-the-money call on the stock. What is the risk-neutral probability that you will excise your call at maturity?

 

2.If you want to price a four-month call option on a stock with a 60% volatility, using a

300-step Cox-Ross-Rubinstein tree, then the gross up-return for the stock you should

use on the tree is closest to:

a.u= 1.01.

b.u= 1.005.

c.u= 1.03.

d.u= 1.02.

3.Suppose a stock is currently priced at 100, and over the next period it will either go

up to 110.20, or down to the "down-price." The simple, one-period risk-free rate is

2%. One-period at-the-money calls are trading at 5.00. What is the down-price of

the stock?

4.Suppose that eighteen-month and 21-month zero-coupon bonds ($1 face values) are

trading at 0.9400 and 0.9300, respectively. What is the eighteen-month forward

price of the three-month rate?

5.Suppose that you are a US-based investor and that US interest rates are higher than

European interest rates. If the US yield curve remains unchanged, but the European

yield curve shifts up halfway to the US yield curve, then:

a.The forward price curve for the Euro gets flatter, becoming less steeply upward

sloping.

b.The forward price curve for the Euro gets steeper, becoming more steeply upward

sloping.

c.The forward price curve for the Euro gets flatter, becoming less steeply downward

sloping.

d.The forward price curve for the Euro gets steeper, becoming more steeply

downward sloping.

Answer rating: 100% (QA)

1 To calculate the riskneutral probability of exercising the call option at maturity we need to use the riskneutral pricing framework The riskneutral ... View the full answer