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Suppose you are attempting to value a 1-year expiration option on a stock with volatility (i.e., annualized standard deviation) of σ = 0.34. What would be the appropriate values for u and d if your binomial model is set up using: a. 1 period of 1 year. b. 4 subperiods, each 3 months. c. 12 subperiods, each 1 month. Note: Do not round intermediate calculations. Round your answers to 4 decimal places. Subperiods 1 At = T/n a. 1/1 = 1 u = exp(σ√ At) 1.5373 d = exp(-σ At) 0.7074 b. 4 1/4 = 0.25 1.1865 0.8477 C. 12 1/12 0.0833 1.1031 0.9118

Suppose you are attempting to value a 1-year expiration option on a stock with volatility (i.e., annualized standard deviation) of σ = 0.34. What would be the appropriate values for u and d if your binomial model is set up using: a. 1 period of 1 year. b. 4 subperiods, each 3 months. c. 12 subperiods, each 1 month. Note: Do not round intermediate calculations. Round your answers to 4 decimal places. Subperiods 1 At = T/n a. 1/1 = 1 u = exp(σ√ At) 1.5373 d = exp(-σ At) 0.7074 b. 4 1/4 = 0.25 1.1865 0.8477 C. 12 1/12 0.0833 1.1031 0.9118

Essentials Of Investments
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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Suppose you are attempting to value a 1-year expiration option on a stock with volatility (i.e., annualized standard deviation) of σ = 0.34. What would be the appropriate values for u and d if your binomial model is set up using: a. 1 period of 1 year. b. 4 subperiods, each 3 months. c. 12 subperiods, each 1 month. Note: Do not round intermediate calculations. Round your answers to 4 decimal places. Subperiods 1 At = T/n a. 1/1 = 1 u = exp(σ√ At) 1.5373 d = exp(-σ At) 0.7074 b. 4 1/4 = 0.25 1.1865 0.8477 C. 12 1/12 0.0833 1.1031 0.9118
Transcribed Image Text:Suppose you are attempting to value a 1-year expiration option on a stock with volatility (i.e., annualized standard deviation) of σ = 0.34. What would be the appropriate values for u and d if your binomial model is set up using: a. 1 period of 1 year. b. 4 subperiods, each 3 months. c. 12 subperiods, each 1 month. Note: Do not round intermediate calculations. Round your answers to 4 decimal places. Subperiods 1 At = T/n a. 1/1 = 1 u = exp(σ√ At) 1.5373 d = exp(-σ At) 0.7074 b. 4 1/4 = 0.25 1.1865 0.8477 C. 12 1/12 0.0833 1.1031 0.9118
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