The following two-step binomial tree depicts the yearly price path of an underlying share. The length...

 

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The following two-step binomial tree depicts the yearly price path of an underlying share. The length of each time step is one year and the risk free rate is 7% pa continuously compounded. Eastpac Bank has offered to sell two-year European call options on this share at a price of $12.12 with a strike price of $43. To determine whether to purchase these options at that price, you have decided to use the binomial tree to calculate the option value and compare this with the price offered. According to your calculations, the option offered by Eastpac Bank is priced under the binomial pricing model you have used. Binomial Share Prices a) b) c) d) e) f) $50.00 $57.50 $42.50 $66.13 $48.88 C $36.13 b) d) >e) -f) The following two-step binomial tree depicts the yearly price path of an underlying share. The length of each time step is one year and the risk free rate is 7% pa continuously compounded. Eastpac Bank has offered to sell two-year European call options on this share at a price of $12.12 with a strike price of $43. To determine whether to purchase these options at that price, you have decided to use the binomial tree to calculate the option value and compare this with the price offered. According to your calculations, the option offered by Eastpac Bank is priced under the binomial pricing model you have used. Binomial Share Prices a) b) c) d) e) f) $50.00 $57.50 $42.50 $66.13 $48.88 C $36.13 b) d) >e) -f)

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Answer The binomial tree represents the possible price paths of the underlying share over two years with the riskfree rate of 7 per annum The tree has ... View the full answer