Question 4 -A stock price is currently worth $20. It is known that at the end of a 6month period it is expected to go up by 8% or down by 5%. The risk-freeinterest rate is 4% per annum with continuous compounding. Use a two-steptree to calculate the value of a 1-year American exotic option whose payoffispayoff max (S+ ST - S²; 0).State in which node the option is early exercised.

Step 1 - Up Node (Su) - Continued (C(Su)):Risk-Neutral Valuation: We assume the expected return on…

Answered: Question 4 - A stock price is currently…

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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A power option pays off [max(S₁ - X),01² at time T where ST is the stock price at time T and X is the strike price. Consider the situation where X = 26 and T is one year. The stock price is currently $24 and at the end of one year it will either $30 or $18. The risk-free interest rate is 5% per annum, compounded continuously. What is the risk- neutral probability of the stock rising to $30? 0.500 0.603 0.450 None of the above
3. A stock has a 15 percent change of moving either up or down per period and is currently priced at $25. Using a one period binomial model, and assuming that the risk-free rate is 10 percent, complete the following. a. Determine the possible stock prices at the end of the first period. b. Calculate the intrinsic values at expiration of an at-the-money European call option. c. Find the value of the option today. d. Construct a hedge by combining a position in stock with a position in the call. Show that the return on the hedge is the risk-free rate regardless of the outcome, assuming that the call sells for the value you obtained in c. e. Determine the rate of return from a riskless hedge if the call is selling for $3.50 when the hedge is initiated.
aa.3 Consider a two-period binomial model, where each period is 6 months. Assume the stock price is $50.00, = 0.20, r = 0.06 and the dividend yield = 3.5%. What is the lowest strike price where early exercise would occur with an American put option?
Question 5: A call option on a stock that expires in a year has a strike price of $99. The current stock price is $100 and the one-year risk free interest rate is 10%. The price of this call is $6. a) Is arbitrage possible? What is the arbitrage position? b) do you het this minimum? Find the minimum arbitrage profit for this strategy. When
Give only typing answer with explanation and conclusion Consider an at-the-money European call option on a non-dividend-paying stock that expires in 0.5 years. The annual standard deviation of the rate of return on the stock is 50% and the risk-free rate is 3% (continuously compounded). 1) What is the call's delta?
Consider a 3-month European call option on a non-dividend-paying stock. The current stock price is $20, the risk-free rate is 6% per annum, and the strike price is $20. Assume a risk-neutral world. You calculate the following values using the Black-Scholes-Merton model: d1 = 0.2000 N(d1) = 0.5793 d2 = 0.1000 N(d2) = 0.5398 a) What is the probability that the call option will be exercised? b) What is the expected stock price at the option’s expiration in 3 months? Assume that all values of the stock price less than $20 are counted as zero. c) What is the expected payoff on the option at expiration (in 3 months)? d) Calculate the PV of the expected payoff from part c).
6
Consider the following data for a certain share. Current Price = S0 = Rs. 80 Exercise Price = E = Rs. 90 Standard deviation of continuously compounded annual return = \sigma = 0.5 Expiration period of the call option = 3 months Risk – free interest rate per annum = 6 percent a. What is the value of the call option? Use the normal distribution table. b. What is the value of a put option?
3. Consider a non-dividend paying stock whose initial stock price is 62 and has a log- volatility of σ = 0.20. The interest rate r = 10%, compounded monthly. Consider a 5-month option with a strike price of 60 in which after exactly 3 months the purchaser may declare this option a (European) call or put option. Assume u = 1.05943 and d = = 0.94390 (a) Compute the values of the binomial lattice for 5 1 month period. 0 1 2 3 4 5 62 (b) Compute the appropriate risk-free rate. (c) Find the risk-neutral probability p of going up? (d) Find the values of call option and put option along this lattice: 0 5.85 1 2 3 4 5 call option 0 1 2 3 4 5 1.40 put option
6. A stock price is currently at $20 and has a volatility of 20% p.a. The risk-free rate is 4% p.a. with continuous compounding. Use a three-step binomial tree model with step size 1 year to compute the arbitrage-free price of an American put option written on that stock with strike price K $20 and maturity T = 3 years.
User A European call option with a strike price of 105 will expire in two years. The current stock price is $ 100. The value of u = 1.3 and the value of d = 0.8. The annual interest rate (based on continuous compounding)is 10%. Using a three-period binomial model （a）Determine the risk-neutral probability values at each end node (Hint: draw a tree) Please draw a binomial tree！！！ Can you give me the steps （b）Find the expected value of the call in two years. （c）Find the current price of the call option.

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