Problem 6 A stock price is currently $35. It is known that at the end of 1 year it will be either $38.5 or $31.5. The risk-free interest rate is 4% per year. What is the value of a 1-year European call option with a strike price of $33?

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 6
A stock price is currently $35. It is known that at the end of 1 year it will be either $38.5
or $31.5. The risk-free interest rate is 4% per year. What is the value of a 1-year
European call option with a strike price of $33?
1) draw the binomial tree for this option
2) detail, or state, the replicating strategy
3) find delta,
4) compute the call option price.
Attach your solution to this question
Transcribed Image Text:Problem 6 A stock price is currently $35. It is known that at the end of 1 year it will be either $38.5 or $31.5. The risk-free interest rate is 4% per year. What is the value of a 1-year European call option with a strike price of $33? 1) draw the binomial tree for this option 2) detail, or state, the replicating strategy 3) find delta, 4) compute the call option price. Attach your solution to this question
Problem 7
Carefully draw the payoff diagram, and calculate and indicate the total payoff in each
region, (S<K1, K1<S<K2 , and S>K2) for the option's strategy that consists of the
following combination. Be as explicit at possible.
Sell 1 (one) European put option with a strike price of K1 = $60
Buy 1 (one) European put option with a strike price of K2 = $70
%3D
Transcribed Image Text:Problem 7 Carefully draw the payoff diagram, and calculate and indicate the total payoff in each region, (S<K1, K1<S<K2 , and S>K2) for the option's strategy that consists of the following combination. Be as explicit at possible. Sell 1 (one) European put option with a strike price of K1 = $60 Buy 1 (one) European put option with a strike price of K2 = $70 %3D
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