4. Option pricing - Multiperiod binomial approach Aa Aa The value of an option can be calculated by using a step-by-step approach in the case of single periods or by using sophisticated formulas that can be easily created through a spreadsheet. In the real world, two possible outcomes f a stock price in six months is an assumption. The stock markets are volatile, and stocks move up and down based o market- and firm-specific factors. Use the following formula to calculate the value of any call option within the same time period. To use the formula different call options, you can solve this formula with algebra or program it into a spreadsheet. Cu{[1 + (rrF / 365)365/(t/n) – d]} Ca{u - [1 + (rRF / 365)365/(t/n)]} u - d u - d Vc = [1 + (rrf / 365)]365/(t/n) Based on your understanding of the binomial option pricing model, is the following statement true or false? Tu is the price of an option that will return $1 if the price of the underlying stock goes up and $0 if the price of underlying stock goes down. True False You have the following information about LearnMore Inc.'s stock and a two-month call option with a strike price of $115.20. LearnMore Inc.'s current stock price is $96.00. You are using the multiperiod binomial option pricing mode to find the value of the two-month option with two periods. Tu and Td values given here apply to any period.
4. Option pricing - Multiperiod binomial approach Aa Aa The value of an option can be calculated by using a step-by-step approach in the case of single periods or by using sophisticated formulas that can be easily created through a spreadsheet. In the real world, two possible outcomes f a stock price in six months is an assumption. The stock markets are volatile, and stocks move up and down based o market- and firm-specific factors. Use the following formula to calculate the value of any call option within the same time period. To use the formula different call options, you can solve this formula with algebra or program it into a spreadsheet. Cu{[1 + (rrF / 365)365/(t/n) – d]} Ca{u - [1 + (rRF / 365)365/(t/n)]} u - d u - d Vc = [1 + (rrf / 365)]365/(t/n) Based on your understanding of the binomial option pricing model, is the following statement true or false? Tu is the price of an option that will return $1 if the price of the underlying stock goes up and $0 if the price of underlying stock goes down. True False You have the following information about LearnMore Inc.'s stock and a two-month call option with a strike price of $115.20. LearnMore Inc.'s current stock price is $96.00. You are using the multiperiod binomial option pricing mode to find the value of the two-month option with two periods. Tu and Td values given here apply to any period.
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. Option pricing - Multiperiod binomial approach
Aa
Aa
The value of an option can be calculated by using a step-by-step approach in the case of single periods or by using
sophisticated formulas that can be easily created through a spreadsheet. In the real world, two possible outcomes for
a stock price in six months is an assumption. The stock markets are volatile, and stocks move up and down based on
market- and firm-specific factors.
Use the following formula to calculate the value of any call option within the same time period. To use the formula for
different call options, you can solve this formula with algebra or program it into a spreadsheet.
Cu{[1 + (rrF / 365)365/(t/n) – d]}
Ca{u - [1 + (rrF / 365)365/(t/n)]}
+
u - d
u - d
Vc =
[1 + (TRF / 365)]365/(t/n)
Based on your understanding of the binomial option pricing model, is the following statement true or false?
Tu is the price of an option that will return $1 if the price of the underlying stock goes up and $0 if the price of
underlying stock goes down.
True
False
You have the following information about LearnMore Inc.'s stock and a two-month call option with a strike price of
$115.20. LearnMore Inc.'s current stock price is $96.00. You are using the multiperiod binomial option pricing model
to find the value of the two-month option with two periods. Mu and TTd values given here apply to any period.](/v2/_next/image?url=https%3A%2F%2Fcontent.bartleby.com%2Fqna-images%2Fquestion%2F8e241797-399b-4dac-ab9c-2b3b625a3d13%2Fcaee18cc-170a-4019-bc09-471b1bbda37c%2F60onnge_processed.png&w=3840&q=75)
Transcribed Image Text:4. Option pricing - Multiperiod binomial approach
Aa
Aa
The value of an option can be calculated by using a step-by-step approach in the case of single periods or by using
sophisticated formulas that can be easily created through a spreadsheet. In the real world, two possible outcomes for
a stock price in six months is an assumption. The stock markets are volatile, and stocks move up and down based on
market- and firm-specific factors.
Use the following formula to calculate the value of any call option within the same time period. To use the formula for
different call options, you can solve this formula with algebra or program it into a spreadsheet.
Cu{[1 + (rrF / 365)365/(t/n) – d]}
Ca{u - [1 + (rrF / 365)365/(t/n)]}
+
u - d
u - d
Vc =
[1 + (TRF / 365)]365/(t/n)
Based on your understanding of the binomial option pricing model, is the following statement true or false?
Tu is the price of an option that will return $1 if the price of the underlying stock goes up and $0 if the price of
underlying stock goes down.
True
False
You have the following information about LearnMore Inc.'s stock and a two-month call option with a strike price of
$115.20. LearnMore Inc.'s current stock price is $96.00. You are using the multiperiod binomial option pricing model
to find the value of the two-month option with two periods. Mu and TTd values given here apply to any period.
Transcribed Image Text:True
False
You have the following information about LearnMore Inc.'s stock and a two-month call option with a strike price of
$115.20. LearnMore Inc.'s current stock price is $96.00. You are using the multiperiod binomial option pricing model
to find the value of the two-month option with two periods. TTu and TId values given here apply to any period.
Data Collected for
LearnMore Inc.
u
1.4885
d
0.5741
Tu
0.1477
Па
0.2572
You work with a junior analyst to calculate the value of the option, and she submits her inferences to you. Which of
the following points are true in the case of LearnMore Inc.'s stock options? Check all that apply.
The value of the call option will always remain $4.09, irrespective of the time until expiration.
O The option payoff if the stock goes down in one month will be $0.00.
LearnMore Inc.'s stock price after one month likely will be $55.11 if the stock goes down by a factor of 0.5741.
The value of the one-month call option with a strike price of $115.20 at the end of one month will be $4.09.
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