Question: Consider a binomial world in which the current stock price of 80 can either go up by 10 percent or down by 8 percent. The

Consider a binomial world in which the current stock price of 80 can either go up by 10 percent or down by 8 percent. The risk-free rate is 4 percent. Assume a one-period world. Answer questions 12 through 15 about a call with an exercise price of 80.

Consider a 2 period Binomial World

1) What is the hedge ratio if the stock goes down one period?

a.0.00

b..0725

c.1.00

d. .73

What is the Current Value of the Call?

a.8.00

b.7.30

c.11.13

d. .619

*PLEASE EXPLAIN AND SHOW STEPS

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!

17. Consider a binomial world in which the current stock price of 80 can either go up by 10 percent or down by 8 percent. The risk-free rate is 4 percent. The exercise price is 80 for a call. Assume...

Consider a binomial world in which the current stock price of 80 can either go up by 10% or down by 7%. The risk free rate is 5%. Assume a one-period world. Use the binomial tree below and answer...

Exhibit 1. Consider a binomial world in which the current stock price of 80 can either go up by 10 percent or down by 8 percent. The risk-free rate is 4 percent and the call exercise price 80....

Please answer the following questions: 1A. The effect of volatility on a call/puts price is a. decreased price due to decreased possible losses b. nominal volatility will not noticeably effect a...

Consider a binomial world in which the current stock price of 80 can either go up by 10 percent or down by 8 percent. The risk-free rate is 4 percent. Assume one period world. u = 1 + 10% = 1.1 d = 1...

1A. What is the lowest possible value of a European put? a. Max(0, X-S 0 ) b. X(1+r) -T c. Max[0, S 0 -X(1+r) -T ] d. Max[0, X(1+r) -T -S 0 )] e. none of the above 1B. Which of the following is the...

Please Show Your work Consider a binomial world in which the current stock price of 80 can either go up by 10 percent or down by 8 percent. The risk-free rate is 4 percent, a call with an exercise...

(Binomial Option Pricing Model) Consider a binomial world in which the current stock price of 80 can either go up by 10 percent or down by 8 percent. The risk-free rate is 4 percent. Assume a...

What are some of the advantages of lean production and JIT manufacturing?

The Krispy Donuts franchise has agreements with 100 franchisees across the United States to operate bakeries. On January 1, 2020, Krispy Donuts grants a franchisee the right to operate a bakery in...

12. AB= and CD=AB. -15 (i) Express CD as a column vector. (ii) Given that A is the point (-2, 7), find the coordinates of the point B. (iii) Given that D is the point (8, -5), find the coordinates of...

Copper can be drawn into thin wires. How many meters of 34 gauge wire (diameter =6.304103in ) can be produced from the copper in 9.10lb of covellite, an ore of copper that is 66.0% copper by mass?...

Interpersonal Communication: Listening to Empathize [LO-4] Think back over conversations you have had with friends, family members, co-workers, or classmates in the past week. Select a conversation...

Nonverbal Communication: Analyzing Nonverbal Signals [LO-5] Select a piece of business mail that you received at work or at home. Analyze its appearance. What nonverbal messages does this piece send?...

Collaboration: Leading Meetings [LO-3], Chapter 1 Every month, each employee in your department is expected to give a brief oral presentation on the status of his or her ongoing projects. However,...