The current price of a non-dividend-paying biotech stock is $140 with a volatility of 25%. The risk-free rate is4%. For a 3-month time step:(a) What is the percentage up movement?(b) What is the percentage down movement?(c) What is the probability of an up movement in a risk-neutral world?(d) What is the probability of a down movement in a risk-neutral world?Use a two-step tree to value a 6-month European call option and a 6-month European put option. In bothcases the strike price is $150.Answer: (For (a) to (d), answer XX.XX if the answer is XX.XX% or 0.XXXX; for the option prices: please roundyou answers to the second decimal places.)(a,(c)(d)Price of the Call:Price of the Put:%%%%

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The current price of a non-dividend-paying biotech stock is $140 with a volatility of 25%. The risk-free rate is 4%. For a 3-month time step: (a) What is the percentage up movement? (b) What is the percentage down movement? (c) What is the probability of an up movement in a risk-neutral world?

The current price of a non-dividend-paying biotech stock is $140 with a volatility of 25%. The risk-free rate is 4%. For a 3-month time step: (a) What is the percentage up movement? (b) What is the percentage down movement? (c) What is the probability of an up movement in a risk-neutral world?

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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Question

The current price of a non-dividend-paying biotech stock is $140 with a volatility of 25%. The risk-free rate is
4%. For a 3-month time step:
(a) What is the percentage up movement?
(b) What is the percentage down movement?
(c) What is the probability of an up movement in a risk-neutral world?
(d) What is the probability of a down movement in a risk-neutral world?
Use a two-step tree to value a 6-month European call option and a 6-month European put option. In both
cases the strike price is $150.
Answer: (For (a) to (d), answer XX.XX if the answer is XX.XX% or 0.XXXX; for the option prices: please round
you answers to the second decimal places.)
(a,
(c)
(d)
Price of the Call:
Price of the Put:
%
%
%
%

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