Consider a three-period binomial model in which a stock currently trades at a price of 65 Euros. The stock price can go up 20% or down 17% each period. The risk-free rate is 5%. Calculate the price of a call option expiring in three periods with an exercise price of 60 Euro.
Consider a three-period binomial model in which a stock currently trades at a price of 65 Euros. The stock price can go up 20% or down 17% each period. The risk-free rate is 5%.
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Calculate the price of a call option expiring in three periods with an exercise price of 60 Euro.
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Based on your answer in (A), calculate the number of units of the underlying stock that would be needed at each point in the binominal tree to construct a risk-free hedge. Use 10000 calls.
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Calculate the price of a call option expiring in three periods with an exercise price of 70 Euro.
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Based on your answer in (C), calculate the number of units of the underlying stock that would be needed at each point in the binominal tree to construct a risk-free hedge. Use 10000 calls.
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