Question: Please draw the tree (second bullet point). Thank you 1.3 We can calculate the relative changes u , d in the binomial tree if we
Please draw the tree (second bullet point). Thank you
1.3 We can calculate the relative changes u , d in the binomial tree if we know the volatility and mean return of the stock. In this formulation, we are assuming the price movement as a logarithm process. To calculate the relative changes, we can use 1 + U = povst and 1 +Dre-ovot In this process, we can calculate k(0,T) = ln(ST/S.) (Proposition 2.12 in the text). Price a 5 month call option where the o = 0.20, So = 62, expiration is 5 months, the strike, X, is 60, and the annual rate of interest is 10% compounded monthly. What is the risk-neutral probability? Draw the entire tree showing all stock prices and option values at each step. 1.3 We can calculate the relative changes u , d in the binomial tree if we know the volatility and mean return of the stock. In this formulation, we are assuming the price movement as a logarithm process. To calculate the relative changes, we can use 1 + U = povst and 1 +Dre-ovot In this process, we can calculate k(0,T) = ln(ST/S.) (Proposition 2.12 in the text). Price a 5 month call option where the o = 0.20, So = 62, expiration is 5 months, the strike, X, is 60, and the annual rate of interest is 10% compounded monthly. What is the risk-neutral probability? Draw the entire tree showing all stock prices and option values at each step
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