3. Consider a non-dividend paying stock whose initial stock price is 62 and has a log-volatility of σ = 0.20. The interest rate r = 10%, compounded monthly. Consider a5-month option with a strike price of 60 in which after exactly 3 months the purchasermay declare this option a (European) call or put option.Assume u = 1.05943 and d == 0.94390(a) Compute the values of the binomial lattice for 5 1 month period.01234562(b) Compute the appropriate risk-free rate.(c) Find the risk-neutral probability p of going up?(d) Find the values of call option and put option along this lattice:05.8512345calloption0123451.40putoption

The objective of the question is to calculate the values of the binomial lattice for a 5-month…

Answered: 3. Consider a non-dividend paying stock…

FINANCIAL ACCOUNTING

10th Edition

ISBN:9781259964947

Author:Libby

Publisher:Libby

Chapter1: Financial Statements And Business Decisions

Section: Chapter Questions

Problem 1Q

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Consider a European call option on a non-dividend-paying stock where the stock price is $33, the strike price is $36, the risk-free rate is 6% per annum, the volatility is 25% per annum and the time to maturity is 6 months. (a) Calculate u and d for a one-step binomial tree. (b) Value the option using a non arbitrage argument. (c) Assume that the option is a put instead of a call. Value the option using the risk neutral approach. (d) Verify that the European call and European put prices found in (b) and (c) satisfy the put-call parity.
7) Consider a European call option on a -dividend-paying stock where the stock price is $40, the strıke price is $40, the risk-free rate is 4% per annum, the volatility is 30% per annum, and the time to maturity is six months. A dividend of $1 is expected in 3 months' time a. Calculate u, d̟ and p for a two-step tree b. Value the option using a two-step tree. c. Value the option with 5 time steps using DerivaGem software.
Consider a European call option and a European put option that have the same underlying stock, the same strike price K = 40, and the same expiration date 6 months from now. The current stock price is $45. a) Suppose the annualized risk-free rate r = 2%, what is the difference between the call premium and the put premium implied by no-arbitrage? b) Suppose the annualized risk-free borrowing rate = 4%, and the annualized risk-free lending rate = 2%. Find the maximum and minimum difference between the call premium and the put premium, i.e., C − P such that there is no arbitrage opportunities.
Suppose a stock is currently (time t = 0) worth 100. Further, suppose the one year annually compounded interest rate is 2%, and the two year annually compounded rate is 3%. Find the following:a) The forward price for a forward contract on the stock with maturity year T1 = 1. b) The forward price for a forward contract on the stock with maturity year T2 = 2.c) The forward price for a forward contract with maturity T1 = 1 on a ZCB with maturity T2 = 2.d) The forward price for a forward contract with maturity T1 = 1 on a forward contract on the stock with maturity T2 = 2 and delivery price K = 101.
Suppose that a call option with a strike price of $48 expires in one year and has a current market price of $5.17. The market price of the underlying stock is $46.25, and the risk-free rate is 1%. Use put-call parity to calculate the price of a put option on the same underlying stock with a strike of $48 and an expiration of one year. The price of a put option on the same underlying stock with a strike of $48 and an expiration of one year is $. (Round to the nearest cent.)
A4)
A European put option on a non-dividend paying stock has strike price of $40 and time to maturity 9 months. Assume the risk-free interest rate is 5% per annum, the volatility is 20% per annum and the current stock price is $38. Using the Black-Scholes model, calculate the price of the European put option.
Consider a 3-month European call option on a non-dividend-paying stock. The current stock price is $20, the risk-free rate is 6% per annum, and the strike price is $20. Assume a risk-neutral world. You calculate the following values using the Black-Scholes-Merton model: d1 = 0.2000 N(d1) = 0.5793 d2 = 0.1000 N(d2) = 0.5398 a) What is the probability that the call option will be exercised? b) What is the expected stock price at the option’s expiration in 3 months? Assume that all values of the stock price less than $20 are counted as zero. c) What is the expected payoff on the option at expiration (in 3 months)? d) Calculate the PV of the expected payoff from part c).
Give typing answer with explanation and conclusion A call option has a strike price of $11, and a time to expiration of 0.8 in years. If the stock is trading for $20, N(d1) = 0.5, N(d2) = 0.12, and the risk free rate is 5.40%, what is the value of the call option?
The price of a share follows the geometric Brownian motion with parameters µ = 0.2 and σ = 0.18. Presently, the share’s price is £38. Consider a call option having one year until its expiration time and having a strike price of £40. The continuously compounded interest rate is 5%. (a) What is the risk-neutral price C of this call option?
Consider a European put and a European call option which are both written on a non-dividend paying stock, have the same strike price K = £80 and expire in T = 2 months. These options are trading for p = £21 and c = £30.80, respectively. The underlying stock price is S0 = £90. The continuously compounded risk-free rate of interest is r = 10% per annum. What is the present value of the arbitrage profit? Please explain your answer and show your workings. In your response, please show all cash flows (both today and at expiration) and explain why this is an arbitrage (i.e. risk-less) profit.
Consider a European put option on a non-dividend paying stock with exercise price 100 USD and expiration time in one year. Interest rate is 1 percent and the price of the stock today is 75 USD. For what price of the option is the Black-Scholes implied volatility equal to 0.35 Use excel.

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