5. Given: Today's stock price is 37. One month from now, the stock price will be either 35 or 40. If it is 35, then the following month the stock price will be either 31 or 37. If it is 40 one month from now, then the following month the price will be either37 or 45. The risk-free rate of interest is 1% per month. How much should one be willing to pay today for a call option on the stock with K = 35 and T = 2 months? Construct the binomial tree for a European call option. At each node, provide the callpremium (1.e., value) as well as \Delta and B.

Let's break down the binomial tree construction and option valuation process in even greater detail,…

Answered: 5. Given: Today's stock price is 37.…

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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Suppose you think AppX stock is going to appreciate substantially in value in the next year. Say the stock's current price, Sø. is $75, and a call option expiring in one year has an exercise price, X, of $75 and is selling at a price, C, of $21. With $21,000 to invest, you are considering three alternatives. a. Invest all $21,000 in the stock, buying 280 shares. b. Invest all $21,000 in 1,000 options (10 contracts). c. Buy 100 options (one contract) for $2,100, and invest the remaining $18,900 in a money market fund paying 6% in interest over 6 months (12% per year). What is your rate of return for each alternative for the following four stock prices in 6 months? (Leave no cells blank - be certain to enter "0" wherever required. Negative amounts should be indicated by a minus sign. Round the "Percentage return of your portfolio (Bills + 100 options)" answers to 2 decimal places.) The total value of your portfolio in six months for each of the following stock prices is: Stock Price All…
A call option currently sells for $9.25. It has a strike price of $45 and six months to maturity. A put with the same strike and expiration date sells for $7.50. If the risk-free interest rate is 6.3 percent, what is the current stock price? (Do not round intermediate calculations. Round your answer to 2 decimal places.) Current stock price
The current price of a non-dividend paying stock is $50. Use a two-step tree to value a European put option on the stock with a strike price of $50 that expires in 12 months. Each step is 6 months, the risk free rate is 5% per annum, and the volatility is 50%. What is the value of the option according to the two-step binomial model. Please enter your answer rounded to two decimal places (and no dollar sign).
A call option currently sells for $7.00. It has a strike price of $40 and five months to maturity. A put with the same strike and expiration date sells for $5.00. If the risk-free interest rate is 5 percent, what is the current stock price? (Do not round intermediate calculations. Round your answer to 2 decimal places.) Current stock price
A stock price is currently $51. It is assumed that at the end of six months it will be either $30 or $74. The risk-free interest rate is 1.3% per annum with continuous compounding. The stock doesn't pay dividends. One-step binomial tree is used to value options. What is the value of a six-month European call option with a strike price of $51? Round your final result to the nearest cents and input one number only, without units or percentage sign [%], using the dot [.] to separate decimals. Your Answer: Answer
There are call and put options on the shares in Nord AS with a redemption price of NOK 55 and one year to maturity. Today's share price is NOK 50. At the end of the year, the stock price will either be 30 kroner or 80 kroner. The risk-free interest rate of 3% per. year. a) What is the value of call options today? b) What is the value of the put options today if the put-buy parity holds? You have a portfolio of 2000 shares in Nord AS, but are starting to worry about that price. must fall. You therefore want to secure yourself by using options. c) Show how you can use call and put options to secure your position your. Explain.
The current stock price of Chocho inc is $120. You expect the stock price a year from now to be either $160.00 or $60.00 with equal probabilities. The interest rate at which investors can borrow is 10%. Using the binomial opm, what should be the price (premium) of a call option with an exercise price of $115.00 and an expiration date one year from now?
The price of a stock is currently $37. Over the next half year, the price is anticipated to rise to $42 or decline to $36. The upside has a 60% probability of occurring. The risk-free interest rate is 5% p.a.. What is the price of a six month call option with an exercise price of $38?
The stock price of Heavy Metal (HM) changes only once a month: either it goes up by 24% or it falls by 20.7%. Its price now is $48. The interest rate is 1.2% per month. What is the value of a one-month call option with an exercise price of $48? What is the option delta? The payoffs of the call option can be replicated by buying shares of stock and borrowing. What amount should be invested in stock and what amount must be borrowed? What is the value of a two-month call option with an exercise price of $49? What is the option delta of the two-month call over the first one-month period?
The current stock price is $10. In each of the next two years, the stock price can either go up by $2 or go down by $2. The stock pays no dividends. The one-year risk-free interest rate is 5% and will remain constant during this two-year period. a) Using the Binomial Model of option pricing, calculate the price of a two-year call option on the stock with a strike price of $13. b) Using Risk Neutral valuation calculate the price of two-year put option on the stock with a strike price of $7.
A stock is currently selling for $39. In one period, the stock will move up by a factor of 1.29 or down by a factor of .53. A call option with a strike price of $50 is available. If the risk-free rate of interest is 2.5 percent for this period, what is the value of the call option?

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