2. Two-step Binomial Tree St=100 Step: n=0 Su=105 Sd=95.23 n=1 Suu=110.25 Sud=Sdu=100 Sdd-90.70 n=2 Consider the above two-step binomial tree, with each step being three months, At-0.25. The stock price is shown on the tree. The annual risk-free rate is 5%. u= Su/St=1.05, d=1/u. There is no dividend from the stock. 1) Consider an at-the-money European call option (S-K) with six-month maturity a) What is the payoff to this call option at the expiration date at each possible stock price? b) Calculate the call option fair value today. 2) Consider a European put option with six-month maturity and a strike price of $90. a) What is the payoff to this put option at the expiration date at each possible stock price? b) Calculate the put option fair value today.
2. Two-step Binomial Tree St=100 Step: n=0 Su=105 Sd=95.23 n=1 Suu=110.25 Sud=Sdu=100 Sdd-90.70 n=2 Consider the above two-step binomial tree, with each step being three months, At-0.25. The stock price is shown on the tree. The annual risk-free rate is 5%. u= Su/St=1.05, d=1/u. There is no dividend from the stock. 1) Consider an at-the-money European call option (S-K) with six-month maturity a) What is the payoff to this call option at the expiration date at each possible stock price? b) Calculate the call option fair value today. 2) Consider a European put option with six-month maturity and a strike price of $90. a) What is the payoff to this put option at the expiration date at each possible stock price? b) Calculate the put option fair value today.
Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
Problem 1PS
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Transcribed Image Text:2. Two-step Binomial Tree
St=100
Step: n=0
Su=105
Sd=95.23
(Bonus question,
maturity
n=1
Suu=110.25
Sud=Sdu=100
Sdd=90.70
n=2
Consider the above two-step binomial tree, with each step being three months, At=0.25. The
stock price is shown on the tree. The annual risk-free rate is 5%. u= Su/St=1.05, d=1/u. There is
no dividend from the stock.
1) Consider an at-the-money European call option (S=K) with six-month maturity
a) What is the payoff to this call option at the expiration date at each possible stock price?
b) Calculate the call option fair value today.
2) Consider a European put option with six-month maturity and a strike price of $90.
a) What is the payoff to this put option at the expiration date at each possible stock price?
b) Calculate the put option fair value today.
) Calculate at-the-money American call option (S-K) with six-month
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