Question: Consider a binomial model. S0 = 4. In each period, the stock price doubles with a probability of 1/2 and halves with a probability of

Consider a binomial model. S0 = 4. In each period, the stock price doubles with a probability of 1/2 and halves with a probability of 1/2. The interest rate is r = 2 . Suppose N = 2.

A contract yields no payment at time t = 0, a payment at time t = 1 of $6 if the stock price decreases and of $0 otherwise, and a payment at time t = 2 of $36 if the stock price has jumped twice, of $18 if the stock price is equal to $4 and of $0 otherwise. What is the fair price of the contract at time t = 0?

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!

Consider a binomial model. S0 = 4. In each period, the stock price doubles with a probability of 1/2 and halves with a probability of 1/2. The interest rate is r = 2 . Suppose N = 2. An American...

Consider a binomial model. S0 = 4. In each period, the stock price doubles with a probability of 1/2 and halves with a probability of 1/2. The interest rate is r = 2 . Suppose N = 2. Show that is not...

For Questions 1-2: Consider a binomial model. So = 4. In each period, the stock price doubles with a probability of 1/2 and halves with a probability of 1/2. The interest rate is r = 3. Suppose N =...

For Questions 3-4: Consider a binomial model. So = 4. In each period, the stock price doubles with a probability of 1/2 and halves with a probability of 1/2. The interest rate is r = = . Suppose N =...

Only question 2 For Questions 1-2: Consider a binomial model. So = 4. In each period, the stock price doubles with a probability of 1/2 and halves with a probability of 1/2. The interest rate is r =...

- For Questions 3-4: Consider a binomial model. So 4. In each period, the stock price doubles with a probability of 1/2 and halves with a probability of 1/2. The interest rate is r = 3. Suppose N =...

The current spot price of a stock is $100 per share, and the risk-free rate is 5%. The stock pays no dividends and costs nothing to store. The forward price is $105. Each period the stock price...

Exercise 3 (20 points) We consider two stocks S, and Sy. At t=0, S.(0) - S,(0) = $100 The returns of the two stocks are independent and each follow a two-period binomial model defined by u = 1.1, d=...

2. Consider a 2-period stock price model. Let r = 0.05 be the discrete interest rate for each of the periods, S(0) = 100 and suppose that the stock price follows the four possible scenarios described...

Consider the binomial model where a non-dividend-paying stock S has current price So = 40 and in 1 year time it can either be 45 or 39. Suppose that each outcome has physical probability p= 1/2. The...

1.An investment will give you monthly payments of $474 for 5 years. If your required return is 10.84%, what is it worth today? 2.You will invest $140 per month. If the rate is 8.5%, how much will you...

A medium- sized grocery store has point- of- sale cash registers. The cash registers automatically summarize sales of all items sold in the store. One major problem facing the store is that of...

Arianna's personal residence has an adjusted basis of $ 3 8 5 , 1 5 0 and a fair market value of $ 3 4 6 , 6 3 5 . Arianna converts the personal residence to rental property. What is Arianna's gain...

The observation method of job analysis data collection faces issues of misunderstood questions, incomplete responses, and low response rates.

What,in your opinion, should the store managers job description look like and what activities should it contain? Based on her review of the stores, Jennifer concluded that one of the first matters...

Whatis human resources planning and how will it help Carters strategic plans? While in college, Jennifer was especially interested in labour forecasting. She learned that a key component of HR...

Outline three quantitative techniques for forecast-ing future HR demand. Outline three strategies usedto forecast internal HRsupply. While in college, Jennifer was especially interested in labour...