A stock index is currently trading at 50. Paul Tripp, CFA, wants to value 2-year index options using the binomial model. The stock will either increase in value by 20% or fall in value by 20%. The annual risk-free interest rate is 6%. No dividends are paid on any of the underlying securities in the index.a. Construct a two-period binomial tree for the value of the stock index.b. Calculate the value of a European call option on the index with an exercise price of 60.c. Calculate the value of a European put option on the index with an exercise price of 60.d. Confirm that your solutions for the values of the call and the put satisfy put-call parity.
A stock index is currently trading at 50. Paul Tripp, CFA, wants to value 2-year index options using the binomial model. The stock will either increase in value by 20% or fall in value by 20%. The annual risk-free interest rate is 6%. No dividends are paid on any of the underlying securities in the index.a. Construct a two-period binomial tree for the value of the stock index.b. Calculate the value of a European call option on the index with an exercise price of 60.c. Calculate the value of a European put option on the index with an exercise price of 60.d. Confirm that your solutions for the values of the call and the put satisfy put-call parity.
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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A stock index is currently trading at 50. Paul Tripp, CFA, wants to value 2-year index options using the binomial model. The stock will either increase in value by 20% or fall in value by 20%.
The annual risk-free interest rate is 6%. No dividends are paid on any of the underlying securities in the index.
a. Construct a two-period binomial tree for the value of the stock index.
b. Calculate the value of a European call option on the index with an exercise price of 60.
c. Calculate the value of a European put option on the index with an exercise price of 60.
d. Confirm that your solutions for the values of the call and the put satisfy put-call parity.
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