The current stock price is 60 dollars. The stock pays no dividends. The volatility is 25%. The continuous compound interest rate is 8%. Problem 1. Use the Binomial model with 3 time periods to find the price of an Average Price Call option that expires in 18 months, with a strike price of 75 dollars. Note that each time period is half a year. Note: The average is based on an arithmetic average. See Remark at the bottom. We do not include the price today when calculating the average. If S(1) is the price of a stock after 1 time period, then A(3) = (S(1) + S(2) +S(3)).
The current stock price is 60 dollars. The stock pays no dividends. The volatility is 25%. The continuous compound interest rate is 8%. Problem 1. Use the Binomial model with 3 time periods to find the price of an Average Price Call option that expires in 18 months, with a strike price of 75 dollars. Note that each time period is half a year. Note: The average is based on an arithmetic average. See Remark at the bottom. We do not include the price today when calculating the average. If S(1) is the price of a stock after 1 time period, then A(3) = (S(1) + S(2) +S(3)).
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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Transcribed Image Text:The current stock price is 60 dollars. The stock pays no dividends.
The volatility is 25%. The continuous compound interest rate is 8%.
Problem 1. Use the Binomial model with 3 time periods to find the price of an
Average Price Call option that expires in 18 months, with a strike price of 75 dollars.
Note that each time period is half a year.
Note: The average is based on an arithmetic average. See Remark at the bottom.
We do not include the price today when calculating the average.
If S(1) is the price of a stock after 1 time period, then A(3) =S(1) + S(2) + S(3) ).
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