shares in Landau plc are traded on the stock market and are currently valued at eu 5 per share. the expected anually compunded annual risk-free rate of interest is 8%. Assuming that the share price of landau plc will either fall in value by 20% or rise in value by 50% each year, calculate the value, according to the binomial option pricing model, of a european call option which entitles its holder to buy one share in landau plc for eu 8 in the three year's time

shares in Landau plc are traded on the stock market and are currently valued at eu 5 per share. the expected anually compunded annual risk-free rate of interest is 8%. Assuming that the share price of landau plc will either fall in value by 20% or rise in value by 50% each year, calculate the value, according to the binomial option pricing model, of a european call option which entitles its holder to buy one share in landau plc for eu 8 in the three year's time

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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The share price of your favourite company is currently traded at a price of £80 and interest is compounded continuously at rate 3.7% per year. Assume that the share evolves according to a discrete time LogNormal process with time measured in years, 0.15 and volatility o = 0.24 drift µ . You decide to buy a European call option with a strike price of £84 and an expiration date of two years from now. What is the no-arbitrage price for this option? State your answer to the nearest pence. Do not enter the pound sign. =
BCD Company offer its investors option contracts to buy their shares at a price of P50. Currently, the value of their stocks in the market stands at P60. The 52-week high of the share price is P83 and its 52-week low is P47. The treasury bill issued by the government yields 8.25% currently. What’s the probability for the up move?
Assume the spot Swiss franc is $0.7085 and the six-month forward rate is $0.7120. What is the Value of a six-month call and a put option with a strike price of $0.6885 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.
The current price of a non-dividend paying stock is $50. Use a two-step tree to value a European put option on the stock with a strike price of $50 that expires in 12 months. Each step is 6 months, the risk free rate is 5% per annum, and the volatility is 50%. What is the value of the option according to the two-step binomial model. Please enter your answer rounded to two decimal places (and no dollar sign).
One share of Napier Inc. is currently trading at $84 per share. In one year, the price is expected either (1) rise to $105 or (2) fall to $60. You are interested in purchasing a call option on Napier, Inc. The option has a strike price of $92 and expires in 1 year. The current risk-free rate for the year is 4%. Based on binomial options pricing (as shown in class), what is a fair price for this option? Answer to the nearest cent, with no punctuation. That is, $5.289 should be entered at 5.29.
The price of a stock, which pays no dividends, is $64 and the strike price of a one year European call option on the stock is $60. The risk-free rate is 3% (continuously compounded). What is the lower bound for the call option? A. $5.98 B. $5.77 C. $4.12 D. $2.17
Assume the spot Swiss franc is $0.7040 and the six-month forward rate is $0.7030. What is the Value of a six-month call and a put option with a strike price of $0.6840 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 stock price of Copious Corp. is currently $30. The stock price 1 year(s) from now will be either $34 or $27. The annual risk-free rate is 1.4%. Using the binomial model, what is the value of a call option with an exercise price of $30 and an expiration date 1 year(s) from now?
Assume the spot Swiss franc is $0.7045 and the six-month forward rate is $0.7040. What is the Value of a six-month call and a put option with a strike price of $0.6845 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
b. What is a lower bound for the price of a nine-month European put option on a non-dividendpaying stock when the stock price is $65, the strike price is $69, and the risk-free interest rate is5% per annum? c. What is a lower bound for the price of a nine-month European call option on a non-dividendpaying stock when the stock price is $75, the strike price is $70, and the risk-free interest rate is8% per annum?
A company’s stock currently sells for $81.16. A one-year European put option on that stock with strike price of $85 sells for $16.24, and the risk free interest rate is 1.6%. The market expects the company to pay dividends during that period, and the market consensus is that present value of those dividends is $5.26. The price of a one-year European call option on that stock with strike price of $85 is $_________. (Note i: answer must be accurate to the nearest cent). (Note ii. Use annual compounding NOT exponential compounding for the purpose of this question).
A European call that will expire in one year is currently trading for $3. Assume the risk-free rate (based on continuous compounding) is 5%, the underlying stock price is $60 and the strike price is $55. a. Is there an arbitrage opportunity? b. Describe exactly what a trader should do to take advantage of the arbitrage opportunity assuming it exists. c. Determine the present value of the profit that the trader can earn assuming you identify an arbitrage opportunity. Use at least four decimal places for those questions that require a numerical answer.

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