2. Consider a non-dividend-paying stock whose current price S(0) = S is $45. After each period...
Fantastic news! We've Found the answer you've been seeking!
Question:
Transcribed Image Text:
2. Consider a non-dividend-paying stock whose current price S(0) = S is $45. After each period there is a 25% chance that the stock price goes up by 25%, 35% chance that the stock price stays the same, and 40% chance that the stock price drops by 20%. Current risk-free interest rate is 7.2% per annum, compounded monthly. Count a month as one period. (a) Find risk-neutral probabilities q1. q2, and qs that make the expectation of any unit stock (a stock valued at $1) after one period (1+r) where r, is the risk-free rate per period, and the standard deviation 0.2. (In other words, find q, 2, and qs such that E[X] = (1+r,) and Var(X) = 0.04 where X is the random variable that represents the unit stock price after one period). (b) Use the above risk-neutral probabilities and a trinomial lattice tree to caleulate the current (t = 0) price of a Europenn call option on the above stock that has strike $49 and expires in four months. (e) Use any method you like to find the current price of a European put option that has the same conditions as the call option in part (b). 2. Consider a non-dividend-paying stock whose current price S(0) = S is $45. After each period there is a 25% chance that the stock price goes up by 25%, 35% chance that the stock price stays the same, and 40% chance that the stock price drops by 20%. Current risk-free interest rate is 7.2% per annum, compounded monthly. Count a month as one period. (a) Find risk-neutral probabilities q1. q2, and qs that make the expectation of any unit stock (a stock valued at $1) after one period (1+r) where r, is the risk-free rate per period, and the standard deviation 0.2. (In other words, find q, 2, and qs such that E[X] = (1+r,) and Var(X) = 0.04 where X is the random variable that represents the unit stock price after one period). (b) Use the above risk-neutral probabilities and a trinomial lattice tree to caleulate the current (t = 0) price of a Europenn call option on the above stock that has strike $49 and expires in four months. (e) Use any method you like to find the current price of a European put option that has the same conditions as the call option in part (b).
Expert Answer:
Answer rating: 100% (QA)
9 find the vis Ic not val Proba biluifies q192 and 43 umit stock 81 atter one Pericd i re wherl yt ... View the full answer
Related Book For
Posted Date:
Students also viewed these finance questions
-
Consider a non-dividend-paying stock whose current price S(0) = S is $50. After each period, there is a 40% chance that the stock price goes up by 25%. If the stock price does not go up, then it...
-
Find these probabilities for a standard normal random variable Z. Be sure to draw a picture to check your calculations. Use the normal table in the back of the book or software. (a) P (Z < 1.5) (b) P...
-
Find these probabilities for a standard normal random variable Z. Be sure to draw a picture for each to check your calculations. Use the normal table in the back of the book or software. (a) P (Z ...
-
Hughes Company has a credit balance of $5,000 in its Allowance for Doubtful Accounts before any adjustments are made at the end of the year. Based on review and aging of its accounts receivable at...
-
Use the population in Exercise 2 of Chapter 4 for this exercise. Let Ïi be proportional to xi. a. Using the draw-by-draw method illustrated in Example 6.8, calculate Ïi for each unit and...
-
Obtain several recent issues of The Wall Street Journal or Business Week (now called Bloomberg Businessweek). Identify, read, and be prepared to discuss at least one article relating to one of the...
-
Washington Tennis & Education Foundation, Inc. (WTEF) is a nonprofit organization operating in the District of Columbia that provides athletic and academic programs for children from low-income...
-
Presented below are the financial statements of Rajesh Company. Additional data:1. Dividends declared and paid were $25,000.2. During the year equipment was sold for $8,500 cash. This equipment cost...
-
2. There are two kinds of people, who are those with college degrees and those without college degrees. Assume that they are all white-collar workers. The wage status is described in Table 1. Table...
-
Using the 4-quarter moving average: What is the forecast for 3Q 2022, 4Q 2022, 1Q 2023, and 2Q 2023 2. Compute the forecast for 3Q 2022, 4Q 2022, 1Q 2023, and 2Q 2023 using exponential smoothing...
-
The category that is generally considered to be the best measure of a company's ability to continue as a going concern is a. cash flows from operating activities. b. cash flows from investing...
-
I want a program to take input from user and build a new class that inherits existing parent class and its functions. is it possible to do so, if yes how do i do that? (Please include a short code)....
-
The financial director deploys a policy regarding approval of payments for travel reimbursements of employees. Payments must be approved by the accounting manager for all payments under $1,000 and...
-
Explore the concept of spectralism in contemporary orchestral music, focusing on the manipulation of sound spectra and the synthesis of complex harmonic textures to evoke unique timbral landscapes.
-
The probabilities of an economic boom, normal economy, and a recession are 2 percent, 93 percent, and 5 percent, respectively. For these economic states, Stock A has deviations from its expected...
-
Jumbo Shrimp Oxymorons, Inc. recently paid a dividend of $2.15 per share. The firm expects explosive growth of 20% over the next two years. After that the firm's managers expect that growth will drop...
-
canyou solve it please Required information [The following information applies to the questions displayed below.] Assume that you are the president of Highlight Construction Company. At the end of...
-
Draw the appropriate control flow graph of the given pseudocode.Make sure to only use one number for blocks of code which are all sequential and when the first line is executed, all of those lines...
-
Suppose that a June put option to sell a share for $60 costs $4 and is held until June. Under what circumstances will the seller of the option (i.e., the party with a short position) make a profit?...
-
Suppose that a stock index is currently 900. The dividend yield is 2%, the risk-free rate is 5%, and the volatility is 40%. Use the results in the Technical Note 27 to calculate the value of a...
-
A bank decides to create a five-year principal-protected note on a non-dividend-paying stock by offering investors a zero-coupon bond plus a bull spread created from calls. The risk-free rate is 4%...
-
From the following account balances of Josland at 31 December 20X2 prepare a balance sheet in both T-format and narrative classified format. Cash at bank $113 500 Accounts receivable (net) 52 400...
-
Flightboat Ltd borrowed $60 000, issued $20 000 worth of ordinary shares, paid a dividend of $50 000 and the owner withdrew $10 000 in cash. What was Flightboats net cash provided (used) by financing...
-
Obtain the Woolworths 2018 annual report and answer the following questions. Required: 1 How does Woolworths report on its corporate responsibility? 2 List three important points the CEO makes...
Study smarter with the SolutionInn App