The price of a commodity is £45. Its volatility is 20% and the risk-free rate of interest is 3% per annum with continuous compounding (for all maturities). Use a three-step binomial tree to value (i) a nine-month European call option with strike £45 and (ii) a nine-month American put option with strike £48. Up and down movement can be calculated using volatility and expiration date (9 month call option).
The price of a commodity is £45. Its volatility is 20% and the risk-free rate of interest is 3% per annum with continuous compounding (for all maturities). Use a three-step binomial tree to value (i) a nine-month European call option with strike £45 and (ii) a nine-month American put option with strike £48. Up and down movement can be calculated using volatility and expiration date (9 month call option).
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
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2.2. The price of a commodity is £45. Its volatility is 20% and the risk-free rate of interest is 3% per annum with continuous compounding (for all maturities). Use a three-step binomial tree to value (i) a nine-month European call option with strike £45 and (ii) a nine-month American put option with strike £48. Up and down movement can be calculated using volatility and expiration date (9 month call option).
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