Assume the cost to buy an asset today is 100. The current value of the asset...

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Assume the cost to buy an asset today is £100. The current value of the asset is unknown but you know it will be worth £150 if the price increases next year and £225 if the price increases the second year as well. Further assume that the value of the asset will be £60 if the price decreases next year and £36 if the price decreases the second year as well. Answer the following questions if the risk-free interest rate is 8% and the risk-adjusted interest rate is 20%. i. Construct a two-step Binomial Tree model and show the values of the asset at every node of the Binomial Tree. ii. Is it worth buying the asset today? iii. How does your answer to (ii) change if by buying the asset you are also given the option to sell 50% of the asset for £58 after 2 years? Assume the cost to buy an asset today is £100. The current value of the asset is unknown but you know it will be worth £150 if the price increases next year and £225 if the price increases the second year as well. Further assume that the value of the asset will be £60 if the price decreases next year and £36 if the price decreases the second year as well. Answer the following questions if the risk-free interest rate is 8% and the risk-adjusted interest rate is 20%. i. Construct a two-step Binomial Tree model and show the values of the asset at every node of the Binomial Tree. ii. Is it worth buying the asset today? iii. How does your answer to (ii) change if by buying the asset you are also given the option to sell 50% of the asset for £58 after 2 years?

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i To construct a twostep Binomial Tree model we can start by calculating the probabilities of the price going up or down each year We know that the ri... View the full answer