A European put option has a strike price of $56 and expires in six months. It...
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A European put option has a strike price of $56 and expires in six months. It is written over a stock that is currently $59, but could either increase by 5% or decrease by 5% over each of the next two three-month periods. The risk-free interest rate is 4% per annum with continuous compounding. i) On the binomial tree diagram below identify the stock prices in the positions indicated by the letters A to F, and the value of the put option at positions D, E and F. Calculate the price of this option today. Explain why the corresponding American put has the same value. ii) iii) D E F [3+3+2=8 marks] A European put option has a strike price of $56 and expires in six months. It is written over a stock that is currently $59, but could either increase by 5% or decrease by 5% over each of the next two three-month periods. The risk-free interest rate is 4% per annum with continuous compounding. i) On the binomial tree diagram below identify the stock prices in the positions indicated by the letters A to F, and the value of the put option at positions D, E and F. Calculate the price of this option today. Explain why the corresponding American put has the same value. ii) iii) D E F [3+3+2=8 marks]
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Answer i Stock Price Calculation Nodes Stock Price B 6195 C 5605 ... View the full answer
Related Book For
Essentials of Business Analytics
ISBN: 978-1285187273
1st edition
Authors: Jeffrey Camm, James Cochran, Michael Fry, Jeffrey Ohlmann, David Anderson, Dennis Sweeney, Thomas Williams
Posted Date:
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