A share price is modelled via a two-period binomial model with initial stock price S =...
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A share price is modelled via a two-period binomial model with initial stock price S = 250, up/down multiplication factors u = 1.2 and d = 0.8, and interest rate 3.2% compounded continuously. (a) Verify that the no-arbitrage assumption is valid in this model. (b) Find the risk-neutral probabilities of up and down movements in the share price. State your answers to three significant figures. (c) Find the no-arbitrage price of a European call option on the share with strike K = 200 and expiry date T = 2. State your answer to the nearest pence. (d) Suppose that we let the strike price K vary and keep the other parameters the same. What is the smallest value of K for which the call would has value zero? Explain your answer. A share price is modelled via a two-period binomial model with initial stock price S = 250, up/down multiplication factors u = 1.2 and d = 0.8, and interest rate 3.2% compounded continuously. (a) Verify that the no-arbitrage assumption is valid in this model. (b) Find the risk-neutral probabilities of up and down movements in the share price. State your answers to three significant figures. (c) Find the no-arbitrage price of a European call option on the share with strike K = 200 and expiry date T = 2. State your answer to the nearest pence. (d) Suppose that we let the strike price K vary and keep the other parameters the same. What is the smallest value of K for which the call would has value zero? Explain your answer.
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Related Book For
Smith and Roberson Business Law
ISBN: 978-0538473637
15th Edition
Authors: Richard A. Mann, Barry S. Roberts
Posted Date:
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