A stock is currently priced at $100 with a standard deviation () of 13.48% pa. The continuously-compounded

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A stock is currently priced at $100 with a standard deviation (σ) of 13.48% pa. The continuously-compounded risk free interest rate is 8% per annum. A European call option with $90 strike price and one year to expiry is written on this stock.

a) Use the delta-hedging approach and a two-step Binomial tree to value the call option.

b) Use the delta-hedging and a two-step Binomial tree to value a European put option with $90 strike and one year to maturity.

c) Does put-call parity hold?

Related Book For answer-question

Management Science The Art of Modeling with Spreadsheets

ISBN: 978-1118582695

4th edition

Authors: Stephen G. Powell, Kenneth R. Baker

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Posted Date: May 07, 2024 08:43 AM

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A stock is currently priced at $100 with a standard deviation () of 13.48% pa. The continuously-compounded

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a To value the European call option using the deltahedging approach and a twostep Binomial tree we need to calculate the option prices at each step of the tree Step 1 Calculate the parameters for the ... View the full answer

Management Science The Art of Modeling with Spreadsheets

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