Price the European call having strike 60 GBP. Use the two-periods binomialmodel with u = 1.1, d = 0.9 and At = 1. Assume that the risk free rate is 5%, and the current price of the underlying asset is 50 GBP.
Price the European call having strike 60 GBP. Use the two-periods binomialmodel with u = 1.1, d = 0.9 and At = 1. Assume that the risk free rate is 5%, and the current price of the underlying asset is 50 GBP.
Intermediate Financial Management (MindTap Course List)
13th Edition
ISBN:9781337395083
Author:Eugene F. Brigham, Phillip R. Daves
Publisher:Eugene F. Brigham, Phillip R. Daves
Chapter5: Financial Options
Section: Chapter Questions
Problem 5MC: In 1973, Fischer Black and Myron Scholes developed the Black-Scholes option pricing model...
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Please answer question 4-d
![4. Answer all parts of this question.
(a) A trader observes an American option and a European option with the
samestrike price, expiration, and underlying stock. He believes that the
European option will have a higher premium than the American option.
Critique his belief that the European option will have a higher premium.
(b) A trader is asked to value a 1-year European call option for Facebook
Ltd.common stock, which last traded at 43 USD. He has collected the following
information: call and put option exercise price 45 USD, 1-year put option price
4 USD, 1-year Treasury bill rate 5.50% continuously compounded. Calculate
the European call option value using put-call parity.
(c) State the effect, if any, of each of the following three variables on the valueof a
call option. (No calculations required.) į. An increase in the short-term interest
rate. ii. An increase in stock price volatility. iii. A decrease in time to option
expiration.
(d) Price the European call having strike 60 GBP. Use the two-periods
binomialmodel with u = 1.1, d = 0.9 and At = 1. Assume that the risk free rate is
5%, and the current price of the underlying asset is 50 GBP.](/v2/_next/image?url=https%3A%2F%2Fcontent.bartleby.com%2Fqna-images%2Fquestion%2Fbc1b7444-b3d5-4ae0-9b77-6d8fc7ed8e2f%2F28755b13-bdf6-4582-9038-2aff2934f053%2Fiwi1wsg_processed.png&w=3840&q=75)
Transcribed Image Text:4. Answer all parts of this question.
(a) A trader observes an American option and a European option with the
samestrike price, expiration, and underlying stock. He believes that the
European option will have a higher premium than the American option.
Critique his belief that the European option will have a higher premium.
(b) A trader is asked to value a 1-year European call option for Facebook
Ltd.common stock, which last traded at 43 USD. He has collected the following
information: call and put option exercise price 45 USD, 1-year put option price
4 USD, 1-year Treasury bill rate 5.50% continuously compounded. Calculate
the European call option value using put-call parity.
(c) State the effect, if any, of each of the following three variables on the valueof a
call option. (No calculations required.) į. An increase in the short-term interest
rate. ii. An increase in stock price volatility. iii. A decrease in time to option
expiration.
(d) Price the European call having strike 60 GBP. Use the two-periods
binomialmodel with u = 1.1, d = 0.9 and At = 1. Assume that the risk free rate is
5%, and the current price of the underlying asset is 50 GBP.
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