A non-dividend stock with a price of $88 has a volatility of 30%. The continuous compounding risk-free

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A non-dividend stock with a price of $88 has a volatility of 30%. The continuous compounding risk-free rate is 12% per annum for all maturities.

a) What are the u, d and p values in the two-digit binomial tree (each digit is 6 months old)?

b) What is the value of a 1-year European call option with a strike price of $100 given by a two-digit binomial tree?

c) Suppose a trader sells 20 call option contracts (2,000 call options). What position in the stock is necessary to maintain the trader's position during trading? (Hint: Find the delta for the first node and answer the question!

Related Book For answer-question

Fundamentals of Futures and Options Markets

ISBN: 978-0132993340

8th edition

Authors: John C. Hull

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Posted Date: Mar 22, 2023 03:39 AM

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A non-dividend stock with a price of $88 has a volatility of 30%. The continuous compounding risk-free

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ANSWER A The following formula are used to price options in the binomial model u size of the up move factoret ... View the full answer

Fundamentals of Futures and Options Markets

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