Let's suppose that current value of stock index, S=$300 and strike price of a 3-year Call...

 

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Let's suppose that current value of stock index, S=$300 and strike price of a 3-year Call option on this index, K=$300. You are also given the following information: ● r=10%, risk-free interest rate, (continuously compounding), T=3 years, time to maturity of Call Option. n=3, three-period binomial tree 8-6.5%, continuous compounded dividend yield on the stock index. u=1.25, and d=0.7. a) Construct the binomial tree for the stock index and Call Option. b) Compute the prices of American and European Call Options. c) What is your replicating portfolio today for a 3-year American Call option on stock index? Let's suppose that current value of stock index, S=$300 and strike price of a 3-year Call option on this index, K=$300. You are also given the following information: ● r=10%, risk-free interest rate, (continuously compounding), T=3 years, time to maturity of Call Option. n=3, three-period binomial tree 8-6.5%, continuous compounded dividend yield on the stock index. u=1.25, and d=0.7. a) Construct the binomial tree for the stock index and Call Option. b) Compute the prices of American and European Call Options. c) What is your replicating portfolio today for a 3-year American Call option on stock index?

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Here are the steps to solve this problem a Construct the binomial tree for the stock index and Call ... View the full answer