Question II: Suppose that the exchange rate is $0.92/e. Let rs = 4%, and re = 3%, u = 1.2, d = 0.9, T = 0.75, number of binomial periods = 3, and K = $1.00 Use Binomial Option pricing to answer the following two questions. (a) What is the price of a 9-month European put? (b) What is the price of a 9-month American put?

Question II: Suppose that the exchange rate is $0.92/e. Let rs = 4%, and re = 3%, u = 1.2, d = 0.9, T = 0.75, number of binomial periods = 3, and K = $1.00 Use Binomial Option pricing to answer the following two questions. (a) What is the price of a 9-month European put? (b) What is the price of a 9-month American put?

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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Q2) Suppose the current one-year euro swap rate y0[0, 1] is 1.74%, and the two-yearand three-year swap rates are 2.24% and 2.55% respectively. Euro swap rates are quotedwith annual payments and 30/360 daycount (thus α = 1). A hedge fund(HF) executes the following two trades with a dealer:1(1) The HF pays fixed and receives floating on e100 million notional of a one-year swap atthe forward swap rate.(2) The HF receives fixed and pays floating on e100 million notional of a three-year swapat the forward swap rate.Assume bid-offer costs are negligible.a) After one year, what net cashflow has the dealer paid to (or received from) the HF?b) Suppose after one year, one-year and two-year euro swap rates are unchanged. What isthe current value of the remaining part of the HF trade?c) Suppose after one year, the one-year euro swap rate is unchanged but the two-year euroswap rate is now Y%. What value of Y gives a total zero profit on the trade (at T = 1)?d) Do you like the trades the HF…
You write a call option with a strike of $1.473/£ and a premium of $0.72. The current spot exchange rate is $1.434/£. What is the option's intrinsic value?
In the context of single period binomial option pricing model with p*d = 0.75 and rf = 0.25 the values of the state price must be equal to A. PV$1u = $0.20 and PV$1d =$0.60 B. PV$1u = $ 0.25 and PV$1d = $0.50 C. PV$1u = $0.20 and PV$1d = $0.50 D. PV$1u = $0.60 and PV$1d =$0.20
Assume that the price of a forward contract is 127.87. The European options on the forward contract has an exercise price $150, expiring in 60 days. 3.75% is the continuously compounded risk-free rate, and volatility is 0.33. A. Using the Black model, calculate the price of a call option on a forward contract. B. Calculate the underlying asset's price. Using the Black-Scholes-Merton model, determine the price of a call option on the underlying asset. Should this pricing be any different from the one calculated in letter A? Explain your answer. C. Using the Black model, calculate the price of a put option on a forward contract. D. Using the Black-Scholes-Merton model, compute the price of a put option on the underlying asset. Should this pricing be any different from the one calculated in letter C? Explain your answer.
Assume the spot Swiss franc is $0.7070 and the six-month forward rate is $0.7090. What is the Value of a six-month call and a put option with a strike price of $0.6870 should sell for in a rational market? Assume the annualized six-month Eurodollar rate is 3.50 percent. Assume the annualized volatility of the Swiss franc is 14.20 percent. Use the European option-pricing models to value the call and put option. This problem can be solved using the FXOPM.xls spreadsheet. (Do not round intermediate calculations. Round your answers to 2 decimal places.) Option Call Put Value cents cents
The current spot exchange rate is $1.25/€ and the three-month forward rate is \$ 1.3 / epsilon . Consider a three-month European put option on €125,000 with a strike price of $ 1.2 / epsilon . If you pay an option premium of $5,000 to buy this put option, at what exchange rate will you break-even? Group of answer choices \$ 1.24 / epsilon $ 1.16/€ $1.20/€ $1.34/€
please compute the two-step binomial model price of a European Call Option with the following characteristics: S = 50 K = 50 Sigma = 30% r = 1.00% T = 6 months D = 0
Give Answer with calculation and also provide correct and incorrect option explanation
The below call option is European. What is the minimum arbitrage profit at time T=1Y arising from the following prices? So = $19.63 T=1Y K = $18 C = $2.77 r = 6% (cont. comp. annual rate) (required precision 0.01 +/- 0.01)
?Q.19 Consider a European call option with the following parameters: Assuming a risk-free annual rate of 8%, what is the probability that the option will be exercised in a risk- neutral world? (If required, use the table at the beginning of the document for statistical calculations.) Strike price USD 48 Expiration 6 months Underlying's Price USD 50 Annual volatility 25% A B C 0.70 0.5761 0.6443 D 0.3668
We will derive a two-state put option value in this problem. Data: S0 = $180; X = $190; 1 + r = 1.10. The two possibilities for ST are $210 and $110.a. The range of S is $100 while that of P is $80 across the two states. What is the hedge ratio of the put? (Negative value should be indicated by a minus sign. Round your answer to 2 decimal places.) (The answer for this one is -.80) :)b. Form a portfolio of four shares of stock and five puts. What is the (nonrandom) payoff to this portfolio? (Round your answer to 2 decimal places.) c. What is the present value of the portfolio? (Round your answer to 2 decimal places.) d. Given that the stock currently is selling at $180, calculate the put value. (Do not round intermediate calculations and round your answer to 2 decimal places.)

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