Question: An asset has a 2-step binomial tree, with the following information: u = 1.05, d = 0.91, price of asset (S) = 150, risk free

An asset has a 2-step binomial tree, with the following information:

u = 1.05, d = 0.91, price of asset (S) = 150, risk free rate (r) = 2%. There is a strike price (K) for a put option (American) on this asset for $156.

a. what is the risk-neutral probability calculation?

b. draw the 2 step binomial tree. At every node, what are the payoffs and what are the intermediate and final option prices? What is the value of the American put option mentioned above?

c) Now assume the option is a European one instead, but everything else stays the same. What is its value?

d) Find the estimation of the volatility and calculate the delta

Please show all steps and calculations involved so that I can fully understand how to solve. Thank you

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!

With the following information: Spot price 100 Strike price 85 Continuously compounded Risk-free rate 2% Continuous Dividend yield 3% Time to maturity 1 year Annualized volatility 0.3 Construct a...

The current price of a stock is $55. Calculate the value of an American put option on the stock using a two-step binomial tree given the following information. The strike price of the option, K =...

BTR Corp. is considering a project for a new cloud-based online storage system for companies and individuals to back up their data. The cost of the project is $55 million, but the future cash flows...

Instructions: You should work individually on this assignment. The assignment must be completed and the answers to the problems below should be submitted in a Word document in the Assignment 2 area...

I wanted to ask a question regarding questions 12 and 13, under section 16.4 of the file I uploaded. In question 12, we had to calculate the value of the firm without leverage. In question 13 we had...

This question concerns Alibaba the internet e-commerce firm that recently went public. It is an open ended question that requires you to utilize the valuation techniques you have learnt in the course...

This is a question for my financial managment class. I could use some help with the formulas and solutions. help find the present value and return rate. Risk free rate of return, pirtfolio rate of...

Question 4 [20 marks) Consider a 3-step binomial option pricing model for valuing a put option over a stock with S = $10 exercise price X=$10 and maturity T=0.75. The volatility, risk free rate and...

I need assistance in completing the open ended portion that could be found on the last page of the pdf file. Part A most importantly is what I need assistance with, the data that needs to be...

Amy Trenton operates a sales booth in computer software trade shows, selling an accounting software package, Accountech. She purchases the package from a software manufacturer for $150 each. Booth...

Consider a Carnot cycle executed in a closed system with 0.003 kg of air. The temperature limits of the cycle are 300 and 900 K, and the minimum and maximum pressures that occur during the cycle are...

. For a portfolio manager pursuing an active management strategy, why might one expect that the backward - looking tracking error at the end of the year will deviate from the forward - looking...

Add "Viggo Mortenslet cast = new Map ( ) ;en " to the cast as the key, with value "Aragorn".