Single step binomial model: 1. XYZ Corp. is currently trading for $40 per share. You believe...

 

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Single step binomial model: 1. XYZ Corp. is currently trading for $40 per share. You believe the stock will either be worth $60 or $30 in one year. The risk-free rate is 20%. What is the value of a European call option with a strike price of $45? 2. What is the value of a European put option with a strike price of $45? (Use replicating portfolios to calculate this.) 3. Verify that put-call parity holds for the prices you calculated in 1) and 2). Two-step binomial model: 4. ABC Corp. is currently trading for $40 per share. You believe that in 6 months, the stock will either be worth $50 or $35. If the stock goes to $50 in 6 months, then in another 6 months it will either go to $65 or to $40. If the stock goes to $35 in six months, then in another 6 months it will either go to $40 or $30. The risk-free rate is 10% per six months. What is the value of a European call option on the stock with a strike price of $402 Single step binomial model: 1. XYZ Corp. is currently trading for $40 per share. You believe the stock will either be worth $60 or $30 in one year. The risk-free rate is 20%. What is the value of a European call option with a strike price of $45? 2. What is the value of a European put option with a strike price of $45? (Use replicating portfolios to calculate this.) 3. Verify that put-call parity holds for the prices you calculated in 1) and 2). Two-step binomial model: 4. ABC Corp. is currently trading for $40 per share. You believe that in 6 months, the stock will either be worth $50 or $35. If the stock goes to $50 in 6 months, then in another 6 months it will either go to $65 or to $40. If the stock goes to $35 in six months, then in another 6 months it will either go to $40 or $30. The risk-free rate is 10% per six months. What is the value of a European call option on the stock with a strike price of $402