You calculated the following values for a two-year at-the-money American put on a stock currently trading at
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Question:
You calculated the following values for a two-year at-the-money American put on a stock currently trading at $99: Su = $128.70 Sd = $79.20
Assume n = 2, the risk-free rate is 9% per annum, and the stock is expected to grow at the same rate for the next two years.
- Calculate and show the stock prices after two years in a binomial tree.
- Calculate p and (1 - p) rounding them to two-digit after decimal.
- Calculate Pu2, Pud, Pd2, Pu, and Pd and show them in a binomial tree.
- Calculate current price of the put.
- Calculate the hedge ratio initially and subsequently.
Related Book For
Fundamentals of Investment Management
ISBN: 978-0078034626
10th edition
Authors: Geoffrey Hirt, Stanley Block
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