For a stock, you are given: i. The current stock price is 90 ii. The stock pays dividends continuously at a rate proportional to its price. The dividend yield is 2% iii. The stock' s volatility is 20% iv. You use a three-period forward binominal tree to model the movement of the stock price. The length of each period is 3 months You are also given that the continuously compounded risk-free rate is 10% Consider a 9-month 90-strike American put on the stock, calculate the risk-neutral probability that option will be exercised before maturity. Possible Answers A 0.1447 B 0.2756 C 0.3928 D 0.5249 E 0.7244
For a stock, you are given: i. The current stock price is 90 ii. The stock pays dividends continuously at a rate proportional to its price. The dividend yield is 2% iii. The stock' s volatility is 20% iv. You use a three-period forward binominal tree to model the movement of the stock price. The length of each period is 3 months You are also given that the continuously compounded risk-free rate is 10% Consider a 9-month 90-strike American put on the stock, calculate the risk-neutral probability that option will be exercised before maturity. Possible Answers A 0.1447 B 0.2756 C 0.3928 D 0.5249 E 0.7244
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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Transcribed Image Text:Question
For a stock, you are given:
i. The current stock price is 90
ii. The stock pays dividends continuously at a rate proportional to its
price. The dividend yield is 2%
iii. The stock' s volatility is 20%
iv. You use a three-period forward binominal tree to model the
movement of the stock price. The length of each period is 3
months
You are also given that the continuously compounded risk-free rate is
10%
Consider a 9-month 90-strike American put on the stock, calculate the
risk-neutral probability that option will be exercised before maturity.
Possible Answers
A 0.1447
B 0.2756
C 0.3928
D 0.5249
E 0.7244
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