Consider a European call option on a non-dividend-paying stock where the stock price is $33, the strike price is $36, the risk-free rate is 6% per annum, the volatility is 25% per annum and the time to maturity is 6 months. (a) Calculate u and d for a one-step binomial tree. (b) Value the option using a non arbitrage argument. (c) Assume that the option is a put instead of a call. Value the option using the risk neutral approach. (d) Verify that the European call and European put prices found in (b) and (c) satisfy the put-call parity.

FINANCIAL ACCOUNTING
10th Edition
ISBN:9781259964947
Author:Libby
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Chapter1: Financial Statements And Business Decisions
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Consider a European call option on a non-dividend-paying stock where the
stock price is $33, the strike price is $36, the risk-free rate is 6% per annum,
the volatility is 25% per annum and the time to maturity is 6 months.
(a) Calculate u and d for a one-step binomial tree.
(b) Value the option using a non arbitrage argument.
(c) Assume that the option is a put instead of a call. Value the option
using the risk neutral approach.
(d) Verify that the European call and European put prices found in (b)
and (c) satisfy the put-call parity.
Transcribed Image Text:Consider a European call option on a non-dividend-paying stock where the stock price is $33, the strike price is $36, the risk-free rate is 6% per annum, the volatility is 25% per annum and the time to maturity is 6 months. (a) Calculate u and d for a one-step binomial tree. (b) Value the option using a non arbitrage argument. (c) Assume that the option is a put instead of a call. Value the option using the risk neutral approach. (d) Verify that the European call and European put prices found in (b) and (c) satisfy the put-call parity.
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