Question: ABC current stock price $625. It will either increase 15% or decrease 20% in one month. If stock price increases in the first month, it

ABC current stock price $625. It will either increase 15% or decrease 20% in one month. If stock price increases in the first month, it will either increase 30% or decrease 15% in the second month. If stock price decreases in the first month, it will either increase 10% or decrease 20% in the second month. The monthly risk-free rate is 2%.

a) Using risk neutral probability approach, calculate the price of a 1-month call option, with exercise price of $625, on ABCs stock. b) Using replication portfolio approach, calculate the price of a 2-month put option, with exercise price of $625, on ABCs stock.

Step by Step Solution

There are 3 Steps involved in it

1 Expert Approved Answer

Step: 1 Unlock blur-text-image

Question Has Been Solved by an Expert!

Get step-by-step solutions from verified subject matter experts

Step: 2 Unlock

Step: 3 Unlock

Students Have Also Explored These Related Finance Questions!

Kindly do not use Excel for the answer. DBC current stock price $625. It will either increase 15% or decrease 20% in one month. If stock price increases in the first month, it will either increase...

DBC current stock price $625. It will either increase 15% or decrease 20% in one month. If stock price increases in the first month, it will either increase 30% or decrease 15% in the second month....

can you please answer #45 and #56? it is from the same document from before. Exam Name___________________________________ MULTIPLE CHOICE. Choose the one alternative that best completes the statement...

an investment will $205,000 at the end of next year for an investment of $183,000 at the start of the year. If the market interest rate is 8% over the same period, should the investment be made?...

45. Luther Industries has a dividend yield of 4.5% and a cost of equity capital of 12%. Luther Industries' dividends are expected to grow at a constant rate indefinitely. The growth rate of Luther's...

please see question 53 about the amount owed in taxes the following year. Exam Name___________________________________ MULTIPLE CHOICE. Choose the one alternative that best completes the statement or...

The price of IBA stock is $111. It will either increase $11 or decrease $8.9 at the end of month 1. If the price is up in the first month, it will either increase $16 or decrease $20 at the end of...

Question 14 Comparing two production methods, we should choose the one with higher variable costs if: A. The expected EBIT is lower than the Sales-EBIT breakeven. B. The expected revenue is lower...

I am in need of assistance in answering these questions. I only have 2 hrs and 30 minutes. Thank you so much for your help! QUESTION 1 ABC Company sells 2,014 chairs a year at an average price per...

As of December 31, 2014, the Tatum Company had 2,000,000 shares of common stock outstanding. On January 1, 2015, Tatum issued 500,000 preferred shares convertible into 1,000,000 common shares. In...

Match the word or phrase with the best description of it. (a) (b) Stockholder (c) (d) (e) (1) (9) (h) Common Stock Creditor Accounts Payable Accounts Receivable Partnership Auditor's Opinion...

Garry has been self employed for twenty - two years. He does not have a pension plan and does not have any RRSP ' s . He plans to retire within eight to ten years. He has saved small amounts all his...

10) For a bond that pays cash interest (i.e., not a zero coupon bond), YTM is (a) always equal to the coupon rate (b) always equal to the current yield (c) is always less than the coupon rate (d) can...

6. Explain the strengths of a dialectical approach.

2. Discuss the types of messages that are communicated nonverbally.

3. Values and Language. Although computer-driven translations have improved dramatically over earlier attempts, translation is still intensely cultural. Communication always involves many layers of...