Problem 22-3 Binomial model The share price of Heavy Metal (HM) changes only once a month Either it goes up by 21% or it falls by 16.9%. Its price now is $41.3. The interest rate is 1.1% per month. a. What is the value of a one-month call option with an exercise price of $41.3? b. What is the option delta? c. The payoffs of the call option can be replicated by buying shares of stock and borrowing. What amount should be invested in stock and what amount must be borrowed? d. What is the value of a two-month call option with an exercise price of $41? e. What is the option delta of the two-month call over the first one-month period? Complete this question by entering your answers in the tabs below. Req A and B Req C Req D and E d. What is the value of a two-month call option with an exercise price of $417 Note: Do not round intermediate calculations. Round your answer to 1 decimal place. e. What is the option delta of the two-month call over the first one-month period? Note: Do not round intermediate calculations. Round your answer to 3 decimal places. d. Option price e. Delta Show less A

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
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Problem 22-3 Binomial model
The share price of Heavy Metal (HM) changes only once a month
Either it goes up by 21% or it falls by 16.9%. Its price now is $41.3. The interest rate is 1.1% per month.
a. What is the value of a one-month call option with an exercise price of $41.3?
b. What is the option delta?
c. The payoffs of the call option can be replicated by buying shares of stock and borrowing. What amount should be invested in
stock and what amount must be borrowed?
d. What is the value of a two-month call option with an exercise price of $41?
e. What is the option delta of the two-month call over the first one-month period?
Complete this question by entering your answers in the tabs below.
Req A and B
Req C
Req D and E
d. What is the value of a two-month call option with an exercise price of $417
Note: Do not round intermediate calculations. Round your answer to 1 decimal place.
e. What is the option delta of the two-month call over the first one-month period?
Note: Do not round intermediate calculations. Round your answer to 3 decimal places.
d. Option price
e. Delta
<Req C
Req D and E >
Show less A
Transcribed Image Text:Problem 22-3 Binomial model The share price of Heavy Metal (HM) changes only once a month Either it goes up by 21% or it falls by 16.9%. Its price now is $41.3. The interest rate is 1.1% per month. a. What is the value of a one-month call option with an exercise price of $41.3? b. What is the option delta? c. The payoffs of the call option can be replicated by buying shares of stock and borrowing. What amount should be invested in stock and what amount must be borrowed? d. What is the value of a two-month call option with an exercise price of $41? e. What is the option delta of the two-month call over the first one-month period? Complete this question by entering your answers in the tabs below. Req A and B Req C Req D and E d. What is the value of a two-month call option with an exercise price of $417 Note: Do not round intermediate calculations. Round your answer to 1 decimal place. e. What is the option delta of the two-month call over the first one-month period? Note: Do not round intermediate calculations. Round your answer to 3 decimal places. d. Option price e. Delta <Req C Req D and E > Show less A
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