Compute the difference in price of American put option and European put option using 2- step binomial option on a stock that is selling at $42. The options will expire is 6-months and the risk-free rate is 12%. In each three-months period the price of stock will be either 10% high or 10% low. (A) S0.42 (B) $2.24 (C) S0.65 (D) $0.52

Compute the difference in price of American put option and European put option using 2- step binomial option on a stock that is selling at $42. The options will expire is 6-months and the risk-free rate is 12%. In each three-months period the price of stock will be either 10% high or 10% low. (A) S0.42 (B) $2.24 (C) S0.65 (D) $0.52

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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Question

Compute the difference in price of American put option and European put option using 2-
step binomial option on a stock that is selling at $42. The options will expire is 6-months
and the risk-free rate is 12%. In each three-months period the price of stock will be either
10% high or 10% low.
(A) $0.42
(B) $2.24
(C) $0.65
(D) S0.52

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Problem 1. Assume that the interest rate is 5%, contimuously compounded annually, and consider call and put options of both American and European style expiring in 6 months on non-dividend paying stock. For each of the following scenarios, check if you can find an arbitrage opportunity and, if you can, describe it: (i) The strike price of a European put option is $3 and the option is traded at $4. (ii) The shares are traded at $3 and the American call option is traded at $3.20.
Suppose ABC's stock price is currently $25. In the next six months it will either fall to $15 or rise to $40. What is the current value of a six-month call option with an exercise price of $20? The six-month risk-free interest rate is 5% (periodic rate). [Use the riskneutral valuation method]A. $20.00 B. $8.57 C. $9.52 D. $13.10
The following 1-year European call options are available on the stock of Vega International, whose stock is trading at €72.50: Strike Price Call Price (€) (€) 60 8.00 75 3.00 90 2.00 What is the maximum profit realised at maturity from a long butterfly spread created from these call options? Assume a risk-free rate of 5%.
D4) Finance Calculate the price of a 3-month American put option on a non-dividend-paying stock when the stock price is $50, the strike price is $50, the risk-free interest rate is 5% per annum, and the volatility is 25% per annum. Use a binomial tree with a time interval of 1 month.
Consider a stock in two periods (two years). The stock price goes up by 30% or down by 10%in each period. Current stock price is $100. There is a European put option on the stock withexercise price $110 and time to maturity of two years. The interest rate in each period is 6%. Inthe template, Date 0 denotes today, Date 1 denotes the end of year 1 and Date 2 denotes the endof year 2. Use the two-period binomial tree model and discrete discounting to find the put optionprice on Date 0.
What is the value of d, of a European call option on a non-dividend-paying stock when the stock price is $60, the strike price is $59, the risk-free interest rate is 5% per annum the volatility (Standard Deviation) is 30% per annum, and the time to maturity is three months? c=SN(d,)-Ke-N(₂) where and O√T OA02704 OB0.2167 *√T OC.0.3561 OD.0.1204
Put–call parity (S21-1) It is possible to buy three-month call options and three-month puts on stock Q. Both options have an exercise price of $60 and both are worth $10. If the interest rate is 5% a year, what is the stock price?
Generic Stock Inc. (GS) is trading at $100. A call option with a strike price of $102, which expires in 6 months, costs $9.52 (assuming a risk - free rate of 5% and a volatility of 0.33). What is the Delta of this option
What is the value of a put option if the underlying stock price is $47, the strike price is $40, the underlying stock volatility is 52 percent, and the risk-free rate is 5.5 percent? Assume the option has 150 days to expiration. (Use 365 days in a year. Do not round intermediate calculations. Round your answer to 2 decimal places.) X Answer is complete but not entirely correct. Value of a put option $ 7.00
Assume that a stock trading for $30 today will be worth either $25 or $35 in two years. A risk-free asset offers an annualized 3% return (continuously compounded) over that time period. • What is the price today of a two-year put option on this stock with a strike price of $32? The maximum error is 0.1. O a. 1.52 O b. 2.47 O c. 1.82 O d. None of these answers O e. 2.07
The current price of a non-dividend paying stock is $30. Use a two-step tree to value a European put option on the stock with a strike price of $32 that expires in 6 months. Each step is 3 months, the risk free rate is 896, and u = 1.1 and d = 0.9. O $2.24 $2.44 $2.64 $2.84
Use the Black-Scholes formula for the following stock: Time to expiration 6 months Standard deviation Exercise price Stock price 41% per year $42 $41 Annual interest rate 7% Dividend Calculate the value of a call option. (Do not round intermediate calculations. Round your answer to 2 decimal places.) Value of a call option

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