For all questions, interest (r) and dividend () rates are continuously compounded unless specified otherwise. For all
Question:
For all questions, interest (r) and dividend () rates are continuously compounded unless specified otherwise.
For all of this question: r = 5%, = 1%, u = 1.07, d = 0.93
a) S0= $56, K = $50, T = 3 months. Find the price of the call option with strike K expiring at time T by finding the replicating portfolio and B.
b) S0= $45.70, K = $50, T = 3 months. Find the price of the call option with strike K expiring at time T by finding the replicating portfolio and B.
c) S0= $50, T = 3 months, Cup= the value of the call you got from part a), Cdn= the value of the call from part b). Price the call option at t = 0 using the replicating portfolio and B.
d) Draw the 2 step binomial tree for the stock prices usingS0= $50, T = 6 months (so h = 3 months). See how you can combine parts a), b), and c) to price the call optionwith strike K expiring at time 6 months.
e) Compute the risk neutral probabilities pupand pdnand use those to price the same option. Do you get the same price as in d)?
Income Tax Fundamentals 2013
ISBN: 9781285586618
31st Edition
Authors: Gerald E. Whittenburg, Martha Altus Buller, Steven L Gill