2. Suppose you collected monthly data on the returns of a given stock. You converted the...

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2. Suppose you collected monthly data on the returns of a given stock. You converted the returns into log returns by setting the return at time t equal to ln(St/St-1) where St is the stock price at time t. Suppose you calculated that the variance of these logged returns is .0004. a) What is the stock's volatility (per year)? b) Suppose you were going to use a 13-period model to estimate the value of an option on this stock that matures in 7 months. What values were you set h and I to in you binomial tree. c) Suppose the continuously compounded risk-free rate was 9% per year. What value would you set r to in your binomial tree? 2. Suppose you collected monthly data on the returns of a given stock. You converted the returns into log returns by setting the return at time t equal to ln(St/St-1) where St is the stock price at time t. Suppose you calculated that the variance of these logged returns is .0004. a) What is the stock's volatility (per year)? b) Suppose you were going to use a 13-period model to estimate the value of an option on this stock that matures in 7 months. What values were you set h and I to in you binomial tree. c) Suppose the continuously compounded risk-free rate was 9% per year. What value would you set r to in your binomial tree?

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Answer a The stocks volatility is 20 per year 0000405 sqrt12 02 b h 01429 and I 08571 17 01429 and 6... View the full answer