3. Consider a one-period binomial model with h = 1, S = 100, r = 0.08, u = 1.5, d = 0.8 and 80. Calculate the price of an American put option on this stock with strike price K = 100. Does early exercise occur?

3. Consider a one-period binomial model with h = 1, S = 100, r = 0.08, u = 1.5, d = 0.8 and 80. Calculate the price of an American put option on this stock with strike price K = 100. Does early exercise occur?

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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4. Which of the below represents the value of an American option in each state? max(Payoff if exercised, Value if held) Payoff if exercised Risk-neutral probability min(Payoff if exercised, Value if held)
What is the Delta of an at-the-money binary option with a payoff 0 at < $100, and payoff 1 at ≥ $100, as it approaches expiry?
3. A bear spread payoff has the form g(ST) = max(K₂- ST, 0) - max(K₁ – ST, 0), where 0 < K₁ < K₂. (a) (b) Sketch the payoff diagram. Use the general formula for the European option pricing function to find the time-zero option price of a bear spread.
Stocks A and B have the following probability distributions of expected future returns: a. Calculate the expected rate of return, B, for Stock B (A = 12.50%.) Do not round intermediate calculations. Round your answer to two decimal places. % b. Calculate the standard deviation of expected returns, GA, for Stock A (σ = 20.90%.) Do not round intermediate calculations. Round your answer to two decimal places. % Now calculate the coefficient of variation for Stock B. Do not round intermediate calculations. Round your answer to two decimal places. Is it possible that most investors might regard Stock B as being less risky than Stock A? I. If Stock B is more highly correlated with the market than A, then it might have a lower beta than Stock A, and hence be less risky in a portfolio sense. II. If Stock B is more highly correlated with the market than A, then it might have the same beta as Stock A, and hence be just as risky in a portfolio sense. III. If Stock B is less highly correlated with…
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Assume a security follows a geometric Brownian motion with volatility parameter = 0.2. Assume the initial price of the security is 21 and the interest rate is 0. It is known that the price of a down-and-in barrier option and a down-and-out barrier option with strike price 19 and expiration 30 days have equal risk-neutral prices. Compute this common risk-neutral price.
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A. An option is trading at $5.03. If it has a delta of -.56, what would the price of the option be if the underlying increases by $.75? What would the price of the option be if the underlying decreases by $.55? B. What type of option is this and how? C. With a delta of -.56, is this option ITM, ATM or OTM and how?
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