a What are the strengths of real option valuation according to the paper? Describe each.

b What are the weaknesses and challenges of real option valuation according to the paper? Describe

each.

Question The price of a stock is currently $ and the historic annualized volatility of that stock is

Assume riskfree interest rate with continuous compounding to be per year. The value of a

month European call option with a strike price at $ is to be found using a twostep binomial option

pricing model. Answer the following to help find the value of the option.

a What are the values of u d and qTo find the value of use the Excel function exp with values

of and

b Draw stock tree using the information provided. Indicate expected values of stock at expiration as well

as at intermediate nodes.

c What are the values of payoffs at expiration at months for the option?

d What are the values at the intermediate nodes at monthfor the option?

It is What is the value of the option at present?

f Draw a treediagram for the option. Indicate the value of the option at each node.

Question Answer questions c to f as above for a month European put option using a twostep binomial

model with strike price at $ The values of u d and q will be same as in part a above. The stock tree will

also be the same for this as part b above.

Question The price of a stock is currently $ and the historic annualized volatility of that stock is

per year. The riskfree interest rate with continuous compounding is per year. Suppose you

are planning to value a month European put option using a fourstep binomial option pricing model. Strike

price for the option is $

aWhat are the values of udand q

b Draw stock tree using the information provided. Indicate value of stock at expiration as well as at the

intermediate nodes. There should be values as shown in the following.

c What are the values of payoff for the option at expiration?

d What are the values of the option at each of the nine intermediate nodes?

It is What is the current price of the option?

Answer rating: 100% (QA)

Question 1 a Strengths of real option valuation according to the paper 1 Flexibility and strategic decisionmaking Real options provide a framework for decisionmaking under uncertainty allowing firms t... View the full answer