Question: Let S(0) = $100, K = $105, r = 8%, T = 0.5 and = 0. Suppose that u = 1.3 and d = 0.8.

Let S(0) = $100, K = $105, r = 8%, T = 0.5 and = 0. Suppose that u = 1.3 and d = 0.8. Using the one-period binomial model, calculate the following:

a. (5 pts) The fair premium for a European put with the above characteristics.

b. (5 pts) The in the corresponding replicating portfolio.

c. (5 pts) The amount B invested in the riskless asset in the replicating portoflio.

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!

Q:

In these problems, n refers to the number of binomial periods. Assume all rates are continuously compounded unless the problem explicitly states otherwise. Let S = $100, K = $105, r = 8%, T = 0.5,...

Q:

1. (20 pts) Let S = $100, K = $105, r = 8%, T = 0.5, and 8 = 0. Let u = 1.3, d = 0.8, and n = 1. Calculate the premium, A and B for a 1-year European call. Calculate the premium, A and B for a 1-year...

Q:

Let S = $100, K = $105, r = 8%, T = 0.5, and = 0. Let u = 1.3, d = 0.8, and n = a. What are the premium, and B for a European call? b. What are the premium, and B for a European put?

Q:

Let S = $100, K = $105, r = 8%, T = 0.5, and = 0. Let u = 1.3, d = 0.8, and n = 1. a. What are the premium, , and B for a European call? b. What are the premium, , and B for a European put?

Q:

1. Let S = $100, K = $105, r = 8%, T = 0.5, and = 0. Let u = 1.3, d = 0.8, and n = 1. a. What are the premium, , and B for a European call? b. What are the premium, , and B for a European put?

Q:

For the next three questions, use the following information: Let S = $100, K = $105, r = 8%, T = 0.5, and 8 = 0. Let u= 1.3, d=0.8, and n=1.

Q:

Question II: The price of a non-dividend-paying stock is $100 and the continuously compounded risk-free rate is 5%. A 1-year European call option with a strike price of $100 x 0.05x1 = $105.127 has a...

Q:

You have the following information about a one-period binomial option pricing model. Let S = $100, K = $95, r = 8%, T = 0.5, u= 1.3, and d = 0.8. Which of the following statement is true ? Group of...

Q:

Let S = $100, K = $95, r =8%, T = 0.5, and = 0. For simplicity, let u = 1.3, d = 0.8 and n = 1 (that is, 1 period). a. Construct the binomial tree. What is the price of a European call? b. (i)...

Q:

Let S = $ 1 0 0 , K = $ 9 5 , r = 8 % , T = 0 . 5 , and \ delta = 0 . For simplicity, let u = 1 . 3 , d = 0 . 8 and n = 1 ( that is , 1 period ) . When constructing the binomial tree for the European...

Q:

What minimum horizontal force F is needed to pull wheel of radius R and mass M over a step of height h as shown in Fig. 9-72 ( R > h)? (a) Assume the force is applied at the top edge as shown. (b)...

Q:

Management has a strategic long-term goal to increase market share by 5% in 5 years. For this year, the goal is to increase sales and net income over the last year. Department managers have...

Q:

Megan is a 3 0 % partner in the XYZ Partnership. On October 1 , 2 0 X 1 , Megan receives a partial liquidating distribution that reduces her interest in XYZ to 1 0 % . Megan's distributive share of...

Q:

The following graph shows isoquants for the technologically efficient bundles of labor and capital for producing 100 and 200 units of output (labeledIQ(Q=100)andIQ(Q=200) , respectively). Suppose the...

Q:

How can the barriers to IMC be overcome?

Q:

What do they need to do differently?

Q:

How is trade involved in a brands IMC?