Question: Consider a stock that is certain to have a value of either $130 or $90 in one year, and each is equally likely to occur.

Consider a stock that is certain to have a value of either $130 or $90 in one year, and each is equally likely to occur. Suppose also that the one-year risk free rate is 2%.

(a) Suppose that the cost of capital for the stock is 10%. Compute the price of the stock S0.

(b) Compute the risk-neutral probability of an up movement to have S1 = $130.

(d) Compute the of the call option.

(e) Suppose that the call sells for $8. What would you do?

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!

Q5b. 15 points Consider a stock that is certain to have a value of either $130 or $90 in one year, and each is equally likely to occur. Suppose also that the one-year risk free rate is 2%. (a) (3...

Consider a stock that is certain to have a value of either $130 or $90 in one year, and each is equally likely to occur. Suppose also that the one-year risk-free rate is 2%. Suppose the cost of...

. Consider a stock that is certain to have a value of either $130 or $90 in one year, and each is equally likely to occur. Suppose also that the one-year risk-free rate is 2%. Suppose the cost of...

. Extra Credit. 10 Points Consider a stock that is certain to have a value of either $130 or $90 in one year, and each is equally likely to occur. Suppose also that the one-year risk-free rate is...

Suppose a non-dividend paying stock now sells at $100, and its price will be either $120 or $90 one year later. The risk-free rate is 9.531% per annum with continuous compounding (or equivalently 10%...

18 1994 P 19 BE4 P 20 32534 P What does the shape of the volatility smile reveal about put options on equity? Options implied volatility : 0 O What does gamma measure? : a. The rate of change of the...

20) Suppose a non-dividend paying stock now sells at $100, and its price will be either $120 or $90 one year later. The risk-free rate is 9.531% per annum with continuous compounding (or equivalently...

Dear Friends, I need the solution by today 11.00 PM. Its really important. I dont have lot of funds. I can only pay $10. Max Harvard Business School 9-292-140 June 12, 1992 Arundel Partners: The...

Please give me solutions for 2 documents. I have a test soon!!! LANCASTER UNIVERSITY 2012 EXAMINATIONS PART II (SECOND AND FINAL YEAR) ACCOUNTING AND FINANCE AcF 305 INTERNATIONAL FINANCIAL...

I need help answering question 13 and 17 in this homework set. Thank you that is all I need currently. HOMEWORK SET 4 Derivatives 1. What is a lower bound for the price of a 4 months call option on a...

The Ath Lucas number is defined as (a) Explain why the Lucas numbers satisfy the Fibonacci iterative equation L(k+2) = L(k+1) + L(k) (b) Write down the first 7 Lucas numbers. (c) Prove that every...

Explain variance, standard deviation and beta. What do these terms describe about data? Show the calculations of variance and standard deviation using one variable such as an grades OR minutes of...

From the perspective of the lender, the benefit of a mortgage is that the lender is contractually entitled to pursue a judicial foreclosure or a non-judicial foreclosure if the borrower defaults on...

Economics. TransCanada Deal with U.S. Carrier Worth $13 Billion Real interest rate (percent per year) 10.0- TransCanada working with Columbia Pipeline Group aims to create a giant natural gas...

Do you believe that a compositional medium such as a digital orientation is an effective guide in helping a newcomer find the right information sources in an organization? Why is expertise so...

Can your company remain in control of its messages if it stays off social media? Why or why not? [LO-2]

To people in some areas of cyberspace Advertising is a four letter word but Marketing is perfectly acceptable. The following items may contain errors in grammar, capitalization, punctuation,...