Question: Using the binomial option pricing model, O calculate the value of the call iT'S = $55, X = 40, and the stock can either be

Using the binomial option pricing model, O calculate the value of the call iT'S = $55, X = 40, and the stock

can either be worth $90 or $30 one year from now. Assume that the risk-free rate is 10%. Without having to perform the calculation if the stock prices one year from now were $80 and $35, would the value of the call be greater or less than the previous value? Explain. How is the B/S model and the binomial model related?

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!

(15 points) Using the binomial option pricing model, (1) calculate the value of the call if S=$95,X=80, and the stock can either be worth $140 or $60 one year from now. Assume that the risk free rate...

Using the binomial option pricing model, 1. Calculate the value of the call if S = $95, X = 80, and the stock can either be worth $140 or $60 one year from now. Assume that the risk-free rate is 10%....

Jennifer is a fund manager who currently manages a $100 million equity portfolio benchmarked to the S&P 500 index. The portfolio has a beta of 1.3. The current S&P 500 index is 3950. Jennifer...

Section II Short Questions Maximum Word Count 3500 words 1. The current share price of Verafon plc is 230 pence. Over the coming year, the share price is expected to either rise or fall by 60%. The...

Please show Excel formulas. You have been given the following information on a call option on the stock of Puckett Industries: P= $65 X = $70 t= 0.5 TRE= 5% = 0.50 a. Using the Black-Scholes Option...

AutoSave . OFF Ch08 P08 Build a Model Merab Q Qv Home Insert Draw Page Layout Formulas Data Review View Share Comments Times New Roman * 10 A" A" 2 Wrap Text v General 2" AY- O. Paste BIUV V QVAV EE...

Finance derivatives Need full answers thx. 1. a) A stock price is currently $30. The risk-free interest rate is 6.5% p.a. compounded semi-annually, and the dividend yield on the stock is 4% p.a....

Assume that the current stock price is $45. The stock price in one year can be either $62 or $25. The risk-free rate is 2%. (a) Calculate today's value of a one-year European call option on the stock...

Binomial tree: change of numeraireConsider a one-step, two-state world where a stock has current price 100. After one year the stock is worth 110 with probability 0.8, and 90 with probability 0.2....

BET, says Sheila Johnson, got off to a good start, but the problem is that then the video revolution started up. What does she mean by the video revolution? Do you agree or disagree with her...

Question 3 Present value is not the amount that must be linested now to produce a known future value. the value now of a future amount. the sum of a series of payments.

9. (15 points) A company is considering a new project that requires an investment of \$5 million. The project is expected to generate cash flows of $2 million in year 1,$3 million in year 2, and $4...

Teamwork. Pair with a classmate and discuss why the indirect plan of communicating bad news usually has an advantage over the direct plan, even in low-context countries like the United States. Be...

Dr. Josephine Markline, a neurologist, is part of a research team with the local university conducting experimental trials of a new drug intended to alleviate tremors for people with Parkinsons...

Write an effective opening buffer for the following situations: (Objectives 3 and 4) a. Your teacher must indicate to a student that a question was answered incorrectly during a class discussion. b....