Question: We can calculate the relative changes u , d in the binomial tree if we know the volatility and mean return of the stock. In

We can calculate the relative changes u , d in the

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 -eV6t and 1+ D-e-V6t In this process, we can calculate k(0, )-In(Sr/So) (Proposition 2.12 in the text). Price a 5 month call option where the 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. 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 -eV6t and 1+ D-e-V6t In this process, we can calculate k(0, )-In(Sr/So) (Proposition 2.12 in the text). Price a 5 month call option where the 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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